UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-8267
EMCOR Group, Inc.
------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2125338
- --------------------------------- --------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
301 Merritt Seven
Norwalk, Connecticut 06851-1060
- --------------------------------- --------------------------------
(Address of Principal Executive (Zip Code)
Offices)
(203) 849-7800
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined by Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Applicable Only To Corporate Issuers
Number of shares of Common Stock outstanding as of the close of business on
October 21, 2008: 65,467,526 shares.
EMCOR GROUP, INC.
INDEX
Page No.
PART I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
as of September 30, 2008 and December 31, 2007 1
Condensed Consolidated Statements of Operations -
three months ended September 30, 2008 and 2007 3
Condensed Consolidated Statements of Operations -
nine months ended September 30, 2008 and 2007 4
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 2008 and 2007 5
Condensed Consolidated Statements of Stockholders'
Equity and Comprehensive Income -
nine months ended September 30, 2008 and 2007 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3 Quantitative and Qualitative Disclosures about Market Risk 31
Item 4 Controls and Procedures 31
PART II - Other Information
Item 1 Legal Proceedings 32
Item 6 Exhibits 33
PART I. - FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2008 2007
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 340,849 $ 251,637
Accounts receivable, net 1,489,495 1,435,268
Costs and estimated earnings in excess
of billings on uncompleted contracts 130,808 144,919
Inventories 61,570 52,247
Prepaid expenses and other 52,841 56,935
---------- ----------
Total current assets 2,075,563 1,941,006
Investments, notes and other long-term
receivables 22,791 22,669
Property, plant and equipment, net 90,609 83,963
Goodwill 574,363 563,918
Identifiable intangible assets, net 270,803 252,146
Other assets 12,797 13,157
---------- ----------
Total assets $3,046,926 $2,876,859
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
- ------------------------------------------------------------------------------------
September 30, December 31,
2008 2007
(Unaudited)
- ------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under working capital credit line $ -- $ --
Current maturities of long-term debt and capital
lease obligations 3,816 3,791
Accounts payable 489,099 537,314
Billings in excess of costs and estimated
earnings on uncompleted contracts 684,597 572,431
Accrued payroll and benefits 227,776 215,554
Other accrued expenses and liabilities 194,228 190,349
---------- ----------
Total current liabilities 1,599,516 1,519,439
Long-term debt and capital lease obligations 196,745 223,453
Other long-term obligations 239,604 248,926
---------- ----------
Total liabilities 2,035,865 1,991,818
---------- ----------
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, zero issued and outstanding -- --
Common stock, $0.01 par value, 200,000,000 shares
authorized, 68,019,610 and 67,821,782 shares
issued, respectively 680 678
Capital surplus 395,876 387,288
Accumulated other comprehensive loss (19,295) (15,102)
Retained earnings 648,224 526,307
Treasury stock, at cost 2,569,184 and 2,625,497
shares, respectively (14,424) (14,130)
---------- ----------
Total stockholders' equity 1,011,061 885,041
---------- ----------
Total liabilities and stockholders' equity $3,046,926 $2,876,859
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)(Unaudited)
- ------------------------------------------------------------------------------
Three months ended September 30, 2008 2007
- ------------------------------------------------------------------------------
Revenues $1,720,349 $1,500,798
Cost of sales 1,496,003 1,331,887
---------- ----------
Gross profit 224,346 168,911
Selling, general and administrative expenses 145,708 113,996
Restructuring expenses -- --
---------- ----------
Operating income 78,638 54,915
Interest expense (2,535) (1,400)
Interest income 2,373 3,566
Minority interest (905) (931)
---------- ----------
Income from continuing operations before income taxes 77,571 56,150
Income tax provision 28,936 19,067
---------- ----------
Income from continuing operations 48,635 37,083
Income from discontinued operation,
net of income tax effect -- 1,253
---------- ----------
Net income $ 48,635 $ 38,336
========== ==========
Basic earnings per common share
From continuing operations $ 0.74 $ 0.57
From discontinued operation -- 0.02
---------- ----------
$ 0.74 $ 0.59
========== ==========
Diluted earnings per common share
From continuing operations $ 0.72 $ 0.55
From discontinued operation -- 0.02
---------- ----------
$ 0.72 $ 0.57
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)(Unaudited)
- ------------------------------------------------------------------------------
Nine months ended September 30, 2008 2007
- ------------------------------------------------------------------------------
Revenues $5,104,724 $4,159,519
Cost of sales 4,465,242 3,696,996
---------- ----------
Gross profit 639,482 462,523
Selling, general and administrative expenses 437,774 348,711
Restructuring expenses 71 93
---------- ----------
Operating income 201,637 113,719
Interest expense (9,160) (2,487)
Interest income 7,565 10,143
Minority interest (1,258) (2,046)
---------- ----------
Income from continuing operations before income taxes 198,784 119,329
Income tax provision 76,867 45,370
---------- ----------
Income from continuing operations 121,917 73,959
Income from discontinued operation,
net of income tax effect -- 2,519
---------- ----------
Net income $ 121,917 $ 76,478
========== ==========
Basic earnings per common share
From continuing operations $ 1.87 $ 1.15
From discontinued operation -- 0.04
---------- ----------
$ 1.87 $ 1.19
========== ==========
Diluted earnings per common share
From continuing operations $ 1.82 $ 1.11
From discontinued operation -- 0.04
---------- ----------
$ 1.82 $ 1.15
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)(Unaudited)
- -----------------------------------------------------------------------------------------------------
Nine months ended September 30, 2008 2007
- -----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $121,917 $ 76,478
Depreciation and amortization 18,704 14,092
Amortization of identifiable intangible assets 17,972 6,997
Minority interest 1,258 2,046
Deferred income taxes (15,327) (17,860)
Gain on sale of discontinued operation, net of income taxes -- (976)
Excess tax benefits from share-based compensation (1,318) (10,550)
Equity income from unconsolidated entities (1,959) (4,089)
Other non-cash items 8,715 3,727
Distributions from unconsolidated entities 3,584 5,469
Changes in operating assets and liabilities 46,157 57,406
-------- --------
Net cash provided by operating activities 199,703 132,740
-------- --------
Cash flows from investing activities:
Payments for acquisitions of businesses, identifiable intangible assets
and related earn-out agreements (47,847) (492,940)
Proceeds from sale of discontinued operation -- 5,494
Proceeds from sale of property, plant and equipment 757 2,717
Purchase of property, plant and equipment (25,191) (14,360)
Investment in and advances to unconsolidated entities and joint ventures (1,292) (1,510)
Net proceeds (disbursements) related to other investments 8 (164)
-------- --------
Net cash used in investing activities (73,565) (500,763)
-------- --------
Cash flows from financing activities:
Proceeds from working capital credit line 58,500 --
Repayments of working capital credit line (58,500) --
Net (repayments) borrowings for long-term debt and debt issuance fees (27,342) 296,007
Repayments of capital lease obligations (715) (540)
Proceeds from exercise of stock options 1,874 8,246
Excess tax benefits from share-based compensation 1,318 10,550
-------- --------
Net cash (used in) provided by financing activities (24,865) 314,263
-------- --------
Effect of exchange rate changes on cash and cash equivalents (12,061) 3,102
-------- --------
Increase (decrease) in cash and cash equivalents 89,212 (50,658)
Cash and cash equivalents at beginning of year 251,637 273,735
-------- --------
Cash and cash equivalents at end of period $340,849 $223,077
======== ========
Supplemental cash flow information:
Cash paid for:
Interest $ 7,740 $ 5,139
Income taxes $ 91,542 $ 55,541
Non-cash financing activities:
Assets acquired under capital lease obligations $ 480 $ 471
Accrued acquisition costs $ -- $ 4,560
Notes receivable from sale of interest in joint venture and subsidiary $ -- $ 2,462
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(In thousands)(Unaudited)
----------------------------------------------------------------------------------
Accumulated
other
Common Capital comprehensive Retained Treasury Comprehensive
Total stock surplus income (loss) (1) earnings stock income
----------------------------------------------------------------------------------
Balance, January 1, 2007 $ 710,309 $673 $354,905 $(28,189) $399,804 $(16,884)
Net income 76,478 -- -- -- 76,478 -- $ 76,478
Foreign currency translation adjustments 7,843 -- -- 7,843 -- -- 7,843
Amortization of unrecognized pension losses,
net of tax benefit of $0.6 million 1,458 -- -- 1,458 -- -- 1,458
--------
Comprehensive income $ 85,779
========
Effect of adopting FIN 48 (305) -- -- -- (305) --
Issuance of treasury stock
for restricted stock units (2) -- -- (311) -- -- 311
Treasury stock, at cost (3) (1,117) -- -- -- -- (1,117)
Common stock issued under
stock option plans, net (4) 23,613 4 20,786 -- -- 2,823
Share-based compensation expense 5,820 -- 5,820 -- -- --
---------- ---- -------- -------- -------- --------
Balance, September 30, 2007 $ 824,099 $677 $381,200 $(18,888) $475,977 $(14,867)
========== ==== ======== ======== ======== ========
Balance, January 1, 2008 $ 885,041 $678 $387,288 $(15,102) $526,307 $(14,130)
Net income 121,917 -- -- -- 121,917 -- $121,917
Foreign currency translation adjustments (5,407) -- -- (5,407) -- -- (5,407)
Amortization of unrecognized pension losses,
net of tax benefit of $0.5 million 1,214 -- -- 1,214 -- -- 1,214
--------
Comprehensive income $117,724
========
Issuance of treasury stock
for restricted stock units (2) -- -- (108) -- -- 108
Treasury stock, at cost (3) (493) -- -- -- -- (493)
Common stock issued under
stock option plans, net (4) 4,141 2 4,048 -- -- 91
Share-based compensation expense 4,648 -- 4,648 -- -- --
---------- ---- -------- -------- -------- --------
Balance, September 30, 2008 $1,011,061 $680 $395,876 $(19,295) $648,224 $(14,424)
========== ==== ======== ======== ======== ========
(1) Represents cumulative foreign currency translation adjustments and pension
liability adjustments.
(2) Represents common stock transferred at cost from treasury stock upon the
issuance of shares in respect of restricted stock units.
(3) Represents value of shares of common stock returned to EMCOR to satisfy
income tax withholding requirements upon the issuance of shares in respect
of restricted stock units.
(4) Includes the tax benefit of stock option exercises of $1.8 million and
$15.4 million for the nine months ended September 30, 2008 and 2007,
respectively.
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared
without audit, pursuant to the interim period reporting requirements of Form
10-Q. Consequently, certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted.
References to the "Company," "EMCOR," "we," "us," "our" and words of similar
import refer to EMCOR Group, Inc. and its consolidated subsidiaries unless the
context indicates otherwise. Readers of this report should refer to the
consolidated financial statements and the notes thereto included in our latest
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
In our opinion, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting only of a normal recurring
nature) necessary to present fairly our financial position and the results of
our operations. The results of operations for the three and nine month periods
ended September 30, 2008 are not necessarily indicative of the results to be
expected for the year ending December 31, 2008.
On July 9, 2007, we effected a 2-for-1 stock split in the form of a stock
distribution of one common share for each common share owned on the record date
of June 20, 2007. The capital stock accounts and all share data, including
earnings per share data, give effect to the stock split, applied retroactively,
to all periods presented.
The results of operations for the 2007 period presented reflect discontinued
operations accounting due to the sale of an ownership interest in a consolidated
joint venture in August 2007.
Certain reclassifications of prior year amounts have been made to conform to
current year presentation.
NOTE B New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement No. 157, "Fair Value Measurements" ("Statement 157"). Statement 157
provides guidance for using fair value to measure assets and liabilities. The
statement applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value. The statement does not expand the use
of fair value in any new circumstances. Statement 157 was effective for our
financial statements beginning with the first quarter of 2008. The adoption of
Statement 157 did not affect our financial position or the results of
operations. However, on February 12, 2008, the FASB issued FASB Staff Position
No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP") that amends
Statement 157 to delay the effective date for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (that is, at least
annually). The FSP defers the effective date of Statement 157 to fiscal years
beginning after November 15, 2008. We have not determined the effect, if any,
the adoption of the FSP will have on our financial position and results of
operations. However, we believe we would likely be required to provide
additional disclosures in future financial statements beginning after the
effective date of the new standard.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("Statement 159"). Statement 159 permits entities to choose
to measure many financial instruments and certain other items at fair value.
Statement 159 was effective for our financial statements beginning with the
first quarter of 2008. We have elected not to account for any additional
financial instruments or other items at fair value pursuant to Statement 159.
In December 2007, the FASB issued Statement No. 141 (revised 2007), "Business
Combinations" ("Statement 141(R)"). Statement 141(R) changes the accounting for
acquisitions, specifically eliminating the step acquisition model, changing the
recognition of contingent consideration from being recognized when it is
probable to recognition at the time of acquisition, disallowing the
capitalization of transaction costs and changing when restructurings related to
acquisitions can be recognized. The standard is effective for fiscal years
beginning on or after December 15, 2008 and will only impact the accounting for
acquisitions that are made after adoption.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE B New Accounting Pronouncements - (continued)
In December 2007, the FASB issued Statement No. 160, "Noncontrolling Interests
in Consolidated Financial Statements - an amendment of ARB No. 51" ("Statement
160"). This statement is effective for fiscal years beginning on or after
December 15, 2008, with earlier adoption prohibited. This statement requires the
recognition of a noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from our equity. The amount of
net income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. It also amends
certain of ARB No. 51's consolidation procedures for consistency with the
requirements of Statement 141(R). This statement also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. We have not determined the effect, if any, the adoption
of Statement 160 will have on our financial position and results of operations.
NOTE C Acquisitions of Businesses
On January 3, 2008, February 29, 2008 and April 1, 2008, we acquired three
companies, which were not material individually or in the aggregate, for an
aggregate purchase price of $41.5 million. One of the companies primarily
provides industrial services to refineries in the southern California market and
another company primarily performs mobile mechanical services in central
Florida. Both of these companies' results have been included in our United
States facilities services reporting segment. The third company is a fire
protection company that has been included in our United States mechanical
construction and facilities services reporting segment. Goodwill and
identifiable intangible assets attributable to these companies, in the
aggregate, were preliminarily valued at $10.0 million and $21.3 million,
respectively, representing the excess purchase price over the fair value amounts
assigned to their net tangible assets.
We believe these acquisitions further our goal of service and geographical
diversification and expansion of our facilities services and fire protection
businesses.
The purchase prices of these and other acquisitions are subject to finalization
based on certain contingencies provided for in their respective purchase
agreements. These acquisitions were accounted for by the purchase method, and
the related purchase prices have been allocated to the assets acquired and
liabilities assumed, based upon the preliminary estimated fair values of the
respective assets and liabilities of the acquired companies at their respective
acquisition dates.
The following table presents the Company's unaudited consolidated pro forma
results of operations, including all companies acquired during 2007, as if the
acquisitions had occurred at the beginning of the period. These pro forma
results of operations are not necessarily indicative of the results of
operations had the acquisitions actually occurred at the beginning of fiscal
2007, nor are they necessarily indicative of future operating results (in
thousands, except per share data):
For the For the
three months ended nine months ended
September 30, 2007 September 30, 2007
------------------ ------------------
Revenues $ 1,579,051 $ 4,469,619
Operating income $ 49,356 (1) $ 139,983 (1)
Income from continuing operations $ 30,310 (1) $ 76,741 (1)
Net income $ 31,563 $ 79,260
Diluted earnings per common share from continuing operations $ 0.45 $ 1.15
Diluted earnings per share $ 0.47 $ 1.19
(1) Includes compensation related expenses of $18.7 million associated with
certain share-based payments made to certain members of management of an
acquired company prior to the acquisition date. These amounts were recorded
in the pre-acquisition financial statements.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE C Acquisitions of Businesses - (continued)
The above unaudited consolidated pro forma results include interest expense
associated with our $300.0 million term loan, the loss of interest income
related to the use of cash for the acquisitions and the amortization expense
associated with the preliminary value placed on the identifiable intangible
assets related to companies acquired during 2007. The value we ascribed to
contract backlog of FR X Ohmstede Acquisition Co. ("Ohmstede"), which we
acquired in September 2007, is being expensed in a manner consistent with its
expected revenue recognition.
NOTE D Disposition of Assets
Results of operations for the three and nine months ended September 30, 2007
presented in our Condensed Consolidated Statements of Operations reflect
discontinued operations accounting.
On August 6, 2007, we sold our majority ownership in a joint venture with CB
Richard Ellis, Inc. ("CBRE") to CBRE for $8.0 million. This sale followed our
purchase, for approximately $0.5 million, of certain of the joint venture's
assets. As of September 30, 2008, the entire sale price of $8.0 million had been
received. The components of the results of discontinued operations for the joint
venture are as follows (in thousands, except per share data):
For the For the
three months ended nine months ended
September 30, 2007 September 30, 2007
------------------ ------------------
Revenues $ 13,236 $ 79,095
Income from discontinued operation $ 277 $ 1,543
Gain on sale of discontinued operation $ 976 $ 976
Net income from discontinued operation $ 1,253 $ 2,519
Diluted earnings per common share from discontinued operation $ 0.02 $ 0.04
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE E Earnings Per Share
Calculation of Basic and Diluted Earnings per Common Share
The following tables summarize our calculation of Basic and Diluted Earnings per
Common Share ("EPS") for the three and nine month periods ended September 30,
2008 and 2007 as adjusted for the July 9, 2007 2-for-1 stock split (in
thousands, except share and per share data):
For the three months ended
September 30,
-----------------------------
2008 2007
----------- -----------
Numerator:
Income before discontinued operation $ 48,635 $ 37,083
Income from discontinued operation -- 1,253
----------- -----------
Net income available to common stockholders $ 48,635 $ 38,336
=========== ===========
Denominator:
Weighted average shares outstanding used to compute basic earnings per common share 65,404,404 64,591,883
Effect of diluted securities - Share-based awards 2,021,318 2,330,128
----------- -----------
Shares used to compute diluted earnings per common share 67,425,722 66,922,011
=========== ===========
Basic earnings per common share:
From continuing operations $ 0.74 $ 0.57
From discontinued operation -- 0.02
----------- -----------
Total $ 0.74 $ 0.59
=========== ===========
Diluted earnings per common share:
From continuing operations $ 0.72 $ 0.55
From discontinued operation -- 0.02
----------- -----------
Total $ 0.72 $ 0.57
=========== ===========
For the nine months ended
September 30,
-----------------------------
2008 2007
----------- -----------
Numerator:
Income before discontinued operation $ 121,917 $ 73,959
Income from discontinued operation -- 2,519
----------- -----------
Net income available to common stockholders $ 121,917 $ 76,478
=========== ===========
Denominator:
Weighted average shares outstanding used to compute basic earnings per common share 65,331,538 64,208,289
Effect of diluted securities - Share-based awards 1,833,342 2,414,669
----------- -----------
Shares used to compute diluted earnings per common share 67,164,880 66,622,958
=========== ===========
Basic earnings per common share:
From continuing operations $ 1.87 $ 1.15
From discontinued operation -- 0.04
----------- -----------
Total $ 1.87 $ 1.19
=========== ===========
Diluted earnings per common share:
From continuing operations $ 1.82 $ 1.11
From discontinued operation -- 0.04
----------- -----------
Total $ 1.82 $ 1.15
=========== ===========
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE E Earnings Per Share - (continued)
There were 120,000 and 285,624 anti-dilutive stock options that were excluded
from the calculation of diluted EPS for the three and nine month periods ended
September 30, 2008, respectively. There were 120,000 stock options that were
excluded from the calculation of diluted EPS for the three and nine month
periods ended September 30, 2007.
NOTE F Inventories
Inventories consist of the following amounts (in thousands):
September 30, December 31,
2008 2007
-------------- --------------
Raw materials and construction materials $ 23,015 $ 21,116
Work in process 39,683 32,515
Reserve for obsolescence (1,128) (1,384)
-------------- --------------
$ 61,570 $ 52,247
============== ==============
NOTE G Long-Term Debt
Long-term debt in the accompanying Condensed Consolidated Balance Sheets
consisted of the following amounts (in thousands):
September 30, December 31,
2008 2007
-------------- --------------
Term Loan $ 198,500 $ 225,000
Capitalized lease obligations 2,010 2,151
Other 51 93
-------------- --------------
200,561 227,244
Less: current maturities 3,816 3,791
-------------- --------------
$ 196,745 $ 223,453
============== ==============
On September 19, 2007, we entered into an agreement providing for a $300.0
million term loan ("Term Loan"). The proceeds were used to pay a portion of the
consideration for the acquisition of Ohmstede and costs and expenses incident
thereto. The Term Loan contains covenants, representations and warranties and
events of default. The Term Loan covenants require, among other things,
maintenance of certain financial ratios and contain certain restrictions with
respect to payment of dividends, common stock repurchases, investments,
acquisitions, indebtedness and capital expenditures. We are required to make
principal payments on the Term Loan in installments on the last day of March,
June, September and December of each year, commencing March 2008 in the amount
of $0.75 million, together with interest on the then outstanding principal
amount. A final payment comprised of all remaining principal and interest is due
on October 17, 2010. The Term Loan is secured by substantially all of our assets
and substantially all of the assets of substantially all of our U.S.
subsidiaries. The Term Loan bears interest at (1) the prime commercial lending
rate announced by Bank of Montreal from time to time (5.0% at September 30,
2008) plus 0.0% to 0.5% based on certain financial tests or (2) U.S. dollar
LIBOR (3.7% at September 30, 2008) plus 1.0% to 2.25% based on certain financial
tests. The interest rate in effect at September 30, 2008 was 4.7%. We have made
prepayments of $99.25 million, and mandatory payments of $2.25 million, to
reduce the balance of the Term Loan to $198.5 million at September 30, 2008.
We capitalized approximately $4.0 million of debt issuance costs associated with
the Term Loan. This amount is being amortized over the life of the Term Loan and
is included as part of interest expense. On March 31, 2008, we made a prepayment
of principal under the Term Loan of $24.25 million, which resulted in our
recording as interest expense accelerated amortization expense related to
capitalized debt issuance costs of $0.3 million for the nine months ended
September 30, 2008.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE H Income Taxes
For the three months ended September 30, 2008 and 2007, our income tax provision
was $28.9 million and $19.1 million, respectively. For the nine months ended
September 30, 2008 and 2007, our income tax provision was $76.9 million and
$45.4 million, respectively. The income tax provisions were recorded at
effective income tax rates of 38.7% and 38.0%, before certain adjustments, for
the nine months ended September 30, 2008 and 2007, respectively. Our income tax
rate was 37.3% for the three months ended September 30, 2008 and was lower than
the effective income tax rate of 38.7% for the nine months ended September 30,
2008, primarily due to a reduction in the valuation allowance for Canadian
deferred tax assets, partially offset by an increase in the liability for
unrecognized income tax benefits for fiscal 2008. Our income tax rate was 34.0%
for the three months ended September 30, 2007 and was lower than the effective
income tax rate of 38.0% for the nine months ended September 30, 2007, primarily
due to a reduction in the United Kingdom income before income taxes for fiscal
2007.
As of September 30, 2008 and December 31, 2007, the total unrecognized income
tax benefits were $9.9 million and $8.8 million, respectively (of which $6.7
million and $5.2 million at September 30, 2008 and December 31, 2007,
respectively, would favorably affect our effective income tax rate, if
recognized). The net change for unrecognized income tax benefits for the nine
months ended September 30, 2008 is primarily attributable to certain state and
local tax issues, various accruals and the expiration of applicable statutes of
limitations.
We recognized interest expense related to liabilities for unrecognized income
tax benefits in the income tax provision. As of September 30, 2008 and December
31, 2007, we had approximately $3.4 million and $3.2 million, respectively, of
accrued interest related to unrecognized income tax benefits included as a
liability on the Condensed Consolidated Balance Sheets, of which approximately
$(0.1) million and $0.2 million were recorded during each of the three and nine
months ended September 30, 2008.
It is possible that approximately $2.7 million of unrecognized income tax
benefits at September 30, 2008, primarily relating to uncertain tax positions
attributable to certain intercompany transactions, will become recognized income
tax benefits in the next twelve months due to the expiration of applicable
statutes of limitations.
The tax years 2005 to 2007 remain open to examination by the Internal Revenue
Service. The tax years 2004 to 2007 remain open to examination by significant
state and local tax jurisdictions in which the Company operates, with the
exception of New York State, where tax years 2001 to 2007 remain open to
examination. The tax years 2000 to 2007 remain open to examination by certain
foreign tax jurisdictions.
NOTE I Common Stock
On September 18, 2007, our stockholders approved an amendment to our Restated
Certificate of Incorporation authorizing an increase in the number of shares of
our common stock from 80.0 million shares to 200.0 million shares. On July 9,
2007, we effected a 2-for-1 stock split in the form of a stock distribution of
one common share for each common share owned, payable to stockholders of record
on June 20, 2007. As of September 30, 2008 and December 31, 2007, 65,450,426 and
65,196,285 shares of our common stock were outstanding, respectively.
For the three months ended September 30, 2008 and 2007, 109,104 and 447,002
shares of common stock, respectively, were issued upon the exercise of stock
options and upon the satisfaction of required conditions under certain of our
share-based compensation plans. For the nine months ended September 30, 2008 and
2007, 274,716 and 1,226,258 shares of common stock, respectively, were issued
upon the exercise of stock options, upon the satisfaction of required conditions
under certain of our share-based compensation plans, and upon grants of shares
of common stock.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE I Common Stock - (continued)
On June 18, 2008, our stockholders approved the adoption by our Board of
Directors of an Employee Stock Purchase Plan (the "Stock Purchase Plan"), which
became effective on October 1, 2008. Under the terms of the Stock Purchase Plan,
the maximum number of shares of our common stock that may be purchased is
3,000,000 shares. Generally, our employees and non-union employees of our United
States and Canadian subsidiaries are eligible to participate in the Stock
Purchase Plan. Employees covered by collective bargaining agreements generally
are not eligible to participate.
NOTE J Retirement Plans
Our United Kingdom subsidiary has a defined benefit pension plan covering all
eligible employees (the "UK Plan"); however, no individual joining the company
after October 31, 2001 may participate in that plan.
Components of Net Periodic Pension Benefit Cost
The components of net periodic pension benefit cost of the UK Plan for the three
and nine months ended September 30, 2008 and 2007 were as follows (in
thousands):
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
2008 2007 2008 2007
-------- -------- -------- --------
Service cost $1,113 $1,674 $ 3,436 $ 4,936
Interest cost 3,647 3,476 11,259 10,248
Expected return on plan assets (3,653) (3,490) (11,277) (10,290)
Amortization of prior service cost and actuarial loss -- -- -- --
Amortization of unrecognized loss 524 694 1,618 2,045
------ ------ ------- -------
Net periodic pension benefit cost $1,631 $2,354 $ 5,036 $ 6,939
====== ====== ======= =======
Employer Contributions
For the nine months ended September 30, 2008, our United Kingdom subsidiary
contributed $8.2 million to its defined benefit pension plan. It anticipates
contributing an additional $2.5 million during the remainder of 2008.
NOTE K Segment Information
We have the following reportable segments which provide services associated with
the design, integration, installation, start-up, operation and maintenance of
various systems: (a) United States electrical construction and facilities
services (involving systems for electrical power transmission and distribution;
premises electrical and lighting systems; low-voltage systems, such as fire
alarm, security and process control; voice and data communication; roadway and
transit lighting; and fiber optic lines); (b) United States mechanical
construction and facilities services (involving systems for heating,
ventilation, air conditioning, refrigeration and clean-room process ventilation;
fire protection; plumbing, process and high-purity piping; water and wastewater
treatment and central plan heating and cooling); (c) United States facilities
services; (d) Canada construction and facilities services; (e) United Kingdom
construction and facilities services; and (f) Other international construction
and facilities services. The segment "United States facilities services"
principally consists of those operations which provide a portfolio of services
needed to support the operation and maintenance of customers' facilities
(industrial maintenance and services; commercial and government site-based
operations and maintenance; military base operations support services; mobile
maintenance and services; facilities management; installation and support for
building systems; technical consulting and diagnostic services; small
modification and retrofit projects; and program development, management and
maintenance for energy systems), which services are not generally related to
customers' construction programs, as well as industrial services operations,
which primarily provide aftermarket maintenance and
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE K Segment Information - (continued)
repair services, replacement parts and fabrication services for highly
engineered shell and tube heat exchangers for the refinery and petrochemical
industries. The Canada, United Kingdom and Other international segments perform
electrical construction, mechanical construction and facilities services. Our
"Other international construction and facilities services" segment, currently
operating only in the Middle East, represents our operations outside of the
United States, Canada and the United Kingdom. The following tables present
information about our segments and geographic areas for the three and nine
months ended September 30, 2008 and 2007 (in thousands):
For the three months ended September 30,
----------------------------------------
2008 2007
---------- ----------
Revenues from unrelated entities:
United States electrical construction and facilities services $ 446,742 $ 350,447
United States mechanical construction and facilities services 625,599 604,302
United States facilities services 365,153 265,091
---------- ----------
Total United States operations 1,437,494 1,219,840
Canada construction and facilities services 114,861 115,141
United Kingdom construction and facilities services 167,994 165,817
Other international construction and facilities services -- --
---------- ----------
Total worldwide operations $1,720,349 $1,500,798
========== ==========
For the three months ended September 30,
----------------------------------------
2008 2007
---------- ----------
Total revenues:
United States electrical construction and facilities services $ 445,575 $ 351,842
United States mechanical construction and facilities services 630,359 609,663
United States facilities services 366,665 268,175
Less intersegment revenues (5,105) (9,840)
---------- ----------
Total United States operations 1,437,494 1,219,840
Canada construction and facilities services 114,861 115,141
United Kingdom construction and facilities services 167,994 165,817
Other international construction and facilities services -- --
---------- ----------
Total worldwide operations $1,720,349 $1,500,798
========== ==========
For the nine months ended September 30,
----------------------------------------
2008 2007
---------- ----------
Revenues from unrelated entities:
United States electrical construction and facilities services $1,277,935 $1,007,850
United States mechanical construction and facilities services 1,854,498 1,684,649
United States facilities services 1,121,815 706,375
---------- ----------
Total United States operations 4,254,248 3,398,874
Canada construction and facilities services 317,061 248,592
United Kingdom construction and facilities services 533,415 512,053
Other international construction and facilities services -- --
---------- ----------
Total worldwide operations $5,104,724 $4,159,519
========== ==========
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE K Segment Information - (continued)
For the nine months ended September 30,
----------------------------------------
2008 2007
---------- ----------
Total revenues:
United States electrical construction and facilities services $1,278,758 $1,012,867
United States mechanical construction and facilities services 1,870,637 1,691,725
United States facilities services 1,127,357 711,353
Less intersegment revenues (22,504) (17,071)
---------- ----------
Total United States operations 4,254,248 3,398,874
Canada construction and facilities services 317,061 248,592
United Kingdom construction and facilities services 533,415 512,053
Other international construction and facilities services -- --
---------- ----------
Total worldwide operations $5,104,724 $4,159,519
========== ==========
For the three months ended September 30,
----------------------------------------
2008 2007
---------- ----------
Operating income (loss):
United States electrical construction and facilities services $ 33,657 $ 21,304
United States mechanical construction and facilities services 31,284 33,444
United States facilities services 22,725 15,113
---------- ----------
Total United States operations 87,666 69,861
Canada construction and facilities services 2,587 3,041
United Kingdom construction and facilities services 4,421 (3,244)
Other international construction and facilities services -- (164)
Corporate administration (16,036) (14,579)
Restructuring expenses -- --
---------- ----------
Total worldwide operations 78,638 54,915
Other corporate items:
Interest expense (2,535) (1,400)
Interest income 2,373 3,566
Minority interest (905) (931)
---------- ----------
Income from continuing operations before income taxes $ 77,571 $ 56,150
========== ==========
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE K Segment Information - (continued)
For the nine months ended September 30,
----------------------------------------
2008 2007
---------- ----------
Operating income (loss):
United States electrical construction and facilities services $ 75,742 $ 53,409
United States mechanical construction and facilities services 74,226 75,271
United States facilities services 83,346 32,607
---------- ----------
Total United States operations 233,314 161,287
Canada construction and facilities services 8,202 2,649
United Kingdom construction and facilities services 10,459 (4,995)
Other international construction and facilities services (596) (442)
Corporate administration (49,671) (44,687)
Restructuring expenses (71) (93)
---------- ----------
Total worldwide operations 201,637 113,719
Other corporate items:
Interest expense (9,160) (2,487)
Interest income 7,565 10,143
Minority interest (1,258) (2,046)
---------- ----------
Income from continuing operations before income taxes $ 198,784 $ 119,329
========== ==========
September 30, December 31,
2008 2007
------------- -------------
Total assets:
United States electrical construction and facilities services $ 440,372 $ 400,403
United States mechanical construction and facilities services 852,887 842,306
United States facilities services 1,042,314 1,001,617
---------- ----------
Total United States operations 2,335,573 2,244,326
Canada construction and facilities services 162,907 146,320
United Kingdom construction and facilities services 251,971 268,336
Other international construction and facilities services 38 246
Corporate administration 296,437 217,631
---------- ----------
Total worldwide operations $3,046,926 $2,876,859
========== ==========
Included in the operating income of $2.6 million for the Canada construction and
facilities services segment for the nine months ended September 30, 2007 was a
gain on the sale of property of $1.4 million.
NOTE L Legal Proceedings
See Part II - Other Information, Item 1. Legal Proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
We are one of the largest mechanical and electrical construction and facilities
services firms in the United States, Canada, the United Kingdom and in the
world. We provide services to a broad range of commercial, industrial, utility
and institutional customers through approximately 70 principal operating
subsidiaries and joint venture entities. Our offices are located in the United
States, Canada and the United Kingdom. In the Middle East, we carry on business
through a joint venture.
Overview
On July 9, 2007, we effected a 2-for-1 stock split in the form of a stock
distribution of one common share for each common share owned on the record date
of June 20, 2007. The earnings per share data give effect to the stock split,
applied retroactively, to all periods presented.
The following table presents selected financial data for the three months ended
September 30, 2008 and 2007 (in thousands, except percentages and per share
data):
For the three months ended
September 30,
---------------------------
2008 2007
---------- ----------
Revenues $1,720,349 $1,500,798
Revenues increase from prior year 14.6% 21.1%
Operating income $ 78,638 $ 54,915
Operating income as a percentage of revenues 4.6% 3.7%
Net income $ 48,635 $ 38,336
Diluted earnings per common share from continuing operations $ 0.72 $ 0.55
The results of our operations for the third quarter of 2008 set new Company
records for a third quarter in terms of revenues, gross profit, gross margin
(gross profit as a percentage of revenues), operating income, operating margin
(operating income as a percentage of revenues), net income and diluted earnings
per common share. These increases were generally attributable to (a) companies
acquired during the last 12 months, (b) improved results of our United Kingdom
construction and facilities services segment, (c) increased revenues from, and
improved performance by, our United States electrical construction and
facilities services segment and (d) increased revenues from, and improved
performance by, our United States facilities services operations (excluding
companies acquired during the last 12 months). The results of our United Kingdom
construction and facilities services segment improved in the 2008 third quarter
compared to the year ago quarter primarily due to the completion of rail
projects in the United Kingdom in 2007 in connection with which we had incurred
losses in 2007. During the third quarter of 2008, companies we acquired during
the last 12 months contributed $99.3 million to revenues and $4.7 million to
operating income (including $4.5 million of amortization expense attributable to
identifiable intangible assets recorded to cost of sales and selling, general
and administrative expenses). Companies acquired during the last 12 months,
which primarily perform industrial facilities services and mobile mechanical
services and are reported within the United States facilities services segment,
contributed $61.6 million and $3.5 million to the increases in revenues and
operating income, respectively. The balance of the increases in revenues and
operating income attributable to companies acquired during the last 12 months
are reported within the United States mechanical construction and facilities
services segment.
Operating Segments
We have the following reportable segments which provide services associated with
the design, integration, installation, start-up, operation and maintenance of
various systems: (a) United States electrical construction and facilities
services (involving systems for electrical power transmission and distribution;
premises electrical and lighting systems; low-voltage systems, such as fire
alarm, security and process control; voice and data communication; roadway and
transit lighting; and fiber optic lines); (b) United States mechanical
construction and facilities services (involving systems for heating,
ventilation, air conditioning, refrigeration and clean-room process ventilation;
fire protection; plumbing, process and high-purity piping; water and wastewater
treatment and central plan heating and cooling); (c) United States facilities
services; (d) Canada construction and facilities services; (e) United Kingdom
construction and facilities services; and (f) Other international construction
and facilities services. The segment "United States facilities services"
principally consists of those operations which provide a portfolio of services
needed to support the operation and maintenance of customers' facilities
(industrial maintenance and services; commercial and government site-based
operations and maintenance; military base operations support services; mobile
maintenance and services; facilities management; installation and support for
building systems; technical consulting and diagnostic services; small
modification and retrofit projects; and program development, management and
maintenance for energy systems), which services are not generally related to
customers' construction programs, as well as industrial services operations,
which primarily provide aftermarket maintenance and repair services, replacement
parts and fabrication services for highly engineered shell and tube heat
exchangers for the refinery and petrochemical industries. The Canada, United
Kingdom and Other international segments perform electrical construction,
mechanical construction and facilities services. Our "Other international
construction and facilities services" segment, currently operating only in the
Middle East, represents our operations outside of the United States, Canada and
the United Kingdom.
Results of Operations
We acquired three companies during the first nine months of 2008 for an
aggregate purchase price of $41.5 million. One of the companies primarily
provides industrial services to refineries in the southern California market and
another company primarily performs mobile mechanical services in central
Florida. Both of these companies' results have been included in our United
States facilities services reporting segment. The third company is a fire
protection company that has been included in our United States mechanical
construction and facilities services reporting segment. These acquisitions
expand our service and geographical offering capabilities. The acquisitions are
not material, individually or in the aggregate, to our results of operations for
the periods presented.
Our reportable segments reflect discontinued operations accounting for the three
and nine months ended September 30, 2007.
Revenues
The following table presents our operating segment revenues from unrelated
entities and their respective percentages of total revenues (in thousands,
except for percentages):
For the three months ended September 30,
--------------------------------------------
% of % of
2008 Total 2007 Total
---------- ----- ---------- -----
Revenues:
United States electrical construction and facilities services $ 446,742 26% $ 350,447 23%
United States mechanical construction and facilities services 625,599 36% 604,302 40%
United States facilities services 365,153 21% 265,091 18%
---------- ----------
Total United States operations 1,437,494 84% 1,219,840 81%
Canada construction and facilities services 114,861 7% 115,141 8%
United Kingdom construction and facilities services 167,994 10% 165,817 11%
Other international construction and facilities services -- -- -- --
---------- ----------
Total worldwide operations $1,720,349 100% $1,500,798 100%
========== ==========
For the nine months ended September 30,
--------------------------------------------
% of % of
2008 Total 2007 Total
---------- ----- ---------- -----
Revenues:
United States electrical construction and facilities services $1,277,935 25% $1,007,850 24%
United States mechanical construction and facilities services 1,854,498 36% 1,684,649 41%
United States facilities services 1,121,815 22% 706,375 17%
---------- ----------
Total United States operations 4,254,248 83% 3,398,874 82%
Canada construction and facilities services 317,061 6% 248,592 6%
United Kingdom construction and facilities services 533,415 10% 512,053 12%
Other international construction and facilities services -- -- -- --
---------- ----------
Total worldwide operations $5,104,724 100% $4,159,519 100%
========== ==========
As described below in more detail, our revenues for the three months ended
September 30, 2008 increased to $1.7 billion compared to $1.5 billion for the
three months ended September 30, 2007, and our revenues for the nine months
ended September 30, 2008 increased to $5.1 billion compared to $4.2 billion for
the nine months ended September 30, 2007. The increase in 2008 revenues compared
to 2007 revenues was generally attributable to companies acquired during the
last 12 months, increased construction work in the United States for the
hospitality and healthcare markets, and increased work by our United States
facilities services operations, primarily by those companies performing mobile
mechanical services. The revenues of our Canada and United Kingdom construction
and facilities services segments also increased for the nine months ended
September 30, 2008 compared to the same period in 2007.
Our backlog at September 30, 2008 was $4.42 billion compared to $4.48 billion of
backlog at September 30, 2007. Our backlog was $4.49 billion at December 31,
2007. Backlog declines as we perform work on existing contracts and increases
with awards of new contracts. The decreases in backlog were primarily due to the
cancellation of certain contracts and a decrease in commercial and hospitality
contracts, partially offset by increased awards of industrial, transportation,
healthcare and water/wastewater construction projects. Backlog is not a term
recognized under United States generally accepted accounting principles;
however, it is a common measurement used in our industry. Backlog includes
unrecognized revenues to be realized from uncompleted construction contracts
plus unrecognized revenues expected to be realized over the remaining term of
facilities services contracts. However, if the remaining term of a facilities
services contract exceeds 12 months, the unrecognized revenues attributable to
such contract included in backlog are limited to only 12 months of revenues.
Revenues of our United States electrical construction and facilities services
segment for the three months ended September 30, 2008 increased $96.3 million
compared to the three months ended September 30, 2007. The increase in this
segment's revenues for the three months ended September 30, 2008 was primarily
due to an increase in commercial and industrial contract revenues. Revenues of
this segment for the nine months ended September 30, 2008 increased $270.1
million compared to the nine months ended September 30, 2007. The increase in
this segment's revenues for the nine months ended September 30, 2008 was
primarily attributable to an increase in hospitality, commercial and industrial
contract revenues.
Revenues of our United States mechanical construction and facilities services
segment for the three months ended September 30, 2008 increased $21.3 million
compared to the three months ended September 30, 2007. Revenues of this segment
for the nine months ended September 30, 2008 increased $169.8 million compared
to the nine months ended September 30, 2007. The increase in this segment's
revenues for the three months ended September 30, 2008 was primarily
attributable to revenues of $37.7 million from companies acquired during the
last 12 months and an increase in healthcare contract revenues, offset by less
hospitality contract revenues in the third quarter of 2008 compared to the year
ago quarter. The increase in this segment's revenues for the nine months ended
September 30, 2008 was primarily attributable to revenues of $100.9 million from
companies acquired during the last 12 months and an increase in healthcare
contract revenues.
Our United States facilities services revenues increased $100.1 million for the
three months ended September 30, 2008 compared to the three months ended
September 30, 2007. Revenues of this segment increased $415.4 million for the
nine months ended September 30, 2008 compared to the nine months ended September
30, 2007. The increases in this segment's revenues during the three and nine
months ended September 30, 2008 were primarily attributable to revenues of $61.6
million and $345.1 million, respectively, from companies acquired during the
last 12 months (most of which were from companies that perform industrial
facilities services) and the balance was primarily from our mobile mechanical
services operations.
Revenues of our Canada construction and facilities services segment decreased by
$0.3 million for the three months ended September 30, 2008 compared to the three
months ended September 30, 2007. Revenues of this segment increased $68.5
million for the nine months ended September 30, 2008 compared to the nine months
ended September 30, 2007. The increase in this segment's revenues for the nine
months ended September 30, 2008 was primarily attributable to an increase in
industrial, power generation and healthcare contract revenues.
United Kingdom construction and facilities services revenues increased $2.2
million for the three months ended September 30, 2008, compared to the three
months ended September 30, 2007. Revenues of this segment increased $21.4
million for the nine months ended September 30, 2008, compared to the nine
months ended September 30, 2007. The increase in this segment's revenues for the
three months ended September 30, 2008 was due to an increase in the amount of
government and institutional construction contract revenues, offset by lower
industrial work. The increase in this segment's revenues for the nine months
ended September 30, 2008 was due to an increase in facilities services work.
These increases were offset by $11.5 million and $10.4 million of decreases in
revenues for the three and nine months ended September 30, 2008, respectively,
related to the weakening of the British pound against the United States dollar.
Other international construction and facilities services activities consist of
operations in the Middle East. All of the current projects in this market are
being performed through a joint venture. The results of the joint venture were
accounted for under the equity method.
Cost of sales and Gross profit
The following table presents our cost of sales, gross profit, and gross profit
as a percentage of revenues (in thousands, except for percentages):
For the three months ended For the nine months ended
September 30, September 30,
----------------------------- -----------------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Cost of sales $1,496,003 $1,331,887 $4,465,242 $3,696,996
Gross profit $ 224,346 $ 168,911 $ 639,482 $ 462,523
Gross profit, as a percentage of revenues 13.0% 11.3% 12.5% 11.1%
Our gross profit (revenues less cost of sales) increased $55.4 million for the
three months ended September 30, 2008 compared to the three months ended
September 30, 2007. Gross profit increased $177.0 million for the nine months
ended September 30, 2008 compared to the nine months ended September 30, 2007.
Gross profit as a percentage of revenues was 13.0% and 11.3% for the three
months ended September 30, 2008 and 2007, respectively. Gross profit as a
percentage of revenues was 12.5% and 11.1% for the nine months ended September
30, 2008 and 2007, respectively. The increase in gross profit for the 2008
periods compared to the 2007 periods was primarily attributable to companies
acquired during the last 12 months and increases in revenues from certain other
United States operations, as well as improved results from our United Kingdom
operations. Companies acquired during the last 12 months contributed $20.2
million and $103.2 million to gross profit for the three and nine months ended
September 30, 2008, respectively. Gross profit, as a percentage of revenues
(gross margin), also improved as a result of (a) companies acquired during the
last 12 months that are reported within the United States facilities services
segment and provide services to the industrial market, (b) companies acquired
during the last 12 months that are reported within the United States mechanical
construction and facilities services segment and (c) improved operating
performance by our United Kingdom operations. The improvements in gross profit
and gross margin for the nine months ended September 30, 2008 were negatively
impacted by $7.9 million of expense in connection with a lawsuit (the "UOSA
Action") and increased amortization expense associated with contract backlog of
companies acquired during the last 12 months. Further information regarding the
UOSA Action is included in Part II - Other Information, Item 1. Legal
Proceedings.
Selling, general and administrative expenses
The following table presents our selling, general and administrative expenses,
and selling, general and administrative expenses as a percentage of revenues (in
thousands, except for percentages):
For the three months ended For the nine months ended
September 30, September 30,
----------------------------- -----------------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Selling, general and administrative expenses $ 145,708 $ 113,996 $ 437,774 $ 348,711
Selling, general and administrative expenses,
as a percentage of revenues 8.5% 7.6% 8.6% 8.4%
Our selling, general and administrative expenses for the three months ended
September 30, 2008 increased $31.7 million to $145.7 million compared to $114.0
million for the three months ended September 30, 2007, primarily attributable to
companies acquired during the last 12 months. Selling, general and
administrative expenses as a percentage of revenues were 8.5% for the three
months ended September 30, 2008, compared to 7.6% for the three months ended
September 30, 2007. Selling, general and administrative expenses as a percentage
of revenues were 8.6% for the nine months ended September 30, 2008 compared to
8.4% for the nine months ended September 30, 2007. For the first nine months of
2008, compared to the first nine months of 2007, selling, general and
administrative expenses increased by $89.1 million, primarily attributable to
companies acquired during the last 12 months. The increase in selling, general
and administrative expenses for the three and nine months ended September 30,
2008, compared to the same periods in 2007, was also due to an increase in
incentive-based compensation recorded and amortization expense of identifiable
intangible assets. The increase for the three month period ended September 30,
2008 was also attributable to a $1.9 million increase in deferred compensation
expense during this period, relating to a liability that is valued based upon
the current market price of our common stock.
Restructuring expenses
Restructuring expenses, primarily related to employee severance obligations,
were zero and $0.07 million for the three and nine months ended September 30,
2008, respectively. Restructuring expenses were zero and $0.09 million for the
three and nine months ended September 30, 2007, respectively. As of September
30, 2008, we had no unpaid severance obligations.
Operating income
The following table presents our operating income (loss), and operating income
(loss) as a percentage of segment revenues from unrelated entities (in
thousands, except for percentages):
For the three months ended September 30,
-----------------------------------------
% of % of
Segment Segment
2008 Revenues 2007 Revenues
-------- -------- -------- --------
Operating income (loss):
United States electrical construction and facilities services $ 33,657 7.5% $ 21,304 6.1%
United States mechanical construction and facilities services 31,284 5.0% 33,444 5.5%
United States facilities services 22,725 6.2% 15,113 5.7%
-------- --------
Total United States operations 87,666 6.1% 69,861 5.7%
Canada construction and facilities services 2,587 2.3% 3,041 2.6%
United Kingdom construction and facilities services 4,421 2.6% (3,244) --
Other international construction and facilities services -- -- (164) --
Corporate administration (16,036) -- (14,579) --
Restructuring expenses -- -- -- --
-------- --------
Total worldwide operations 78,638 4.6% 54,915 3.7%
Other corporate items:
Interest expense (2,535) (1,400)
Interest income 2,373 3,566
Minority interest (905) (931)
-------- --------
Income from continuing operations before income taxes $ 77,571 $ 56,150
======== ========
For the nine months ended September 30,
-----------------------------------------
% of % of
Segment Segment
2008 Revenues 2007 Revenues
-------- -------- -------- --------
Operating income (loss):
United States electrical construction and facilities services $ 75,742 5.9% $ 53,409 5.3%
United States mechanical construction and facilities services 74,226 4.0% 75,271 4.5%
United States facilities services 83,346 7.4% 32,607 4.6%
-------- --------
Total United States operations 233,314 5.5% 161,287 4.7%
Canada construction and facilities services 8,202 2.6% 2,649 1.1%
United Kingdom construction and facilities services 10,459 2.0% (4,995) --
Other international construction and facilities services (596) -- (442) --
Corporate administration (49,671) -- (44,687) --
Restructuring expenses (71) -- (93) --
-------- --------
Total worldwide operations 201,637 4.0% 113,719 2.7%
Other corporate items:
Interest expense (9,160) (2,487)
Interest income 7,565 10,143
Minority interest (1,258) (2,046)
-------- --------
Income from continuing operations before income taxes $198,784 $119,329
======== ========
As described below in more detail, operating income increased by $23.7 million
for the three months ended September 30, 2008 to $78.6 million compared to
operating income of $54.9 million for the three months ended September 30, 2007.
Operating income increased by $87.9 million for the nine months ended September
30, 2008 to $201.6 million compared to $113.7 million for the nine months ended
September 30, 2007. Operating income as a percentage of revenues ("operating
margin") increased to 4.6% for the three months ended September 30, 2008
compared to 3.7% for the three months ended September 30, 2007, and increased to
4.0% for the nine months ended September 30, 2008 compared to 2.7% for the nine
months ended September 30, 2007. The improvement in operating margin was in
large part due to an increase in operating income attributable to the industrial
services and mobile mechanical services companies acquired during the last 12
months that are reported within our United States facilities services segment,
as well as to improved operating performance by our international businesses.
United States electrical construction and facilities services operating income
of $33.7 million for the three months ended September 30, 2008 increased $12.4
million compared to operating income of $21.3 million for the three months ended
September 30, 2007. Operating income of $75.7 million for the nine months ended
September 30, 2008 increased $22.3 million compared to operating income of $53.4
million for the nine months ended September 30, 2007. The increases in operating
income during the three and nine months ended September 30, 2008 compared to the
same periods in 2007 were primarily the result of increases in hospitality and
commercial projects. Selling, general and administrative expenses were higher
for the three and nine months ended September 30, 2008 compared to the same
periods in 2007 principally due to increased incentive-based compensation
recorded due to improved earnings.
United States mechanical construction and facilities services operating income
for the three months ended September 30, 2008 was $31.3 million, a $2.2 million
decrease compared to operating income of $33.4 million for the three months
ended September 30, 2007. Operating income for the nine months ended September
30, 2008 was $74.2 million, a $1.0 million decrease compared to operating income
of $75.3 million for the nine months ended September 30, 2007. Operating income
decreased during the three months ended September 30, 2008 primarily due to
significant losses incurred at one of our subsidiaries, which subsidiary was
profitable in the comparable period. The decrease in operating income during the
nine months ended September 30, 2008 was primarily due to $7.9 million of
expense in connection with the UOSA Action and the significant losses incurred
at one of our subsidiaries, which subsidiary was profitable in the comparable
period. These decreases were offset by increases to operating income by
companies acquired during the last 12 months, which contributed $1.2 million and
$5.7 million for the three and nine months ended September 30, 2008,
respectively. Selling, general and administrative expenses were higher primarily
due to companies acquired during the last 12 months. Further information
regarding the UOSA Action is included in Part II - Other Information, Item 1.
Legal Proceedings.
United States facilities services operating income for the three months ended
September 30, 2008 was $22.7 million compared to operating income of $15.1
million for the three months ended September 30, 2007. Operating income for the
nine months ended September 30, 2008 was $83.3 million compared to operating
income of $32.6 million for the nine months ended September 30, 2007. The
increases in operating income during the three and nine months ended September
30, 2008 compared to the prior year periods were primarily due to (a) companies
acquired during the last 12 months, which contributed $3.5 million and $44.4
million, respectively, of the increases in operating income, and were primarily
attributable to companies that perform industrial facilities services and (b)
increased income from our mobile mechanical and commercial site-based services
operations. As a result of acquisitions, amortization expense increased by $4.3
million during the three months ended September 30, 2008 compared to the three
months ended September 30, 2007. Amortization expense increased by $12.7 million
during the nine months ended September 30, 2008 compared to the nine months
ended September 30, 2007. Selling, general and administrative expenses increased
by $16.3 million and $47.8 million for the three and nine months ended September
30, 2008 compared to the three and nine months ended September 30, 2007,
respectively, primarily due to companies acquired during the last 12 months.
Our Canada construction and facilities services operating income was $2.6
million for the three months ended September 30, 2008, compared to operating
income of $3.0 million for the three months ended September 30, 2007. This
segment's operating income was $8.2 million for the nine months ended September
30, 2008 compared to operating income of $2.6 million for the nine months ended
September 30, 2007. The operating income improvement for the nine months ended
September 30, 2008 compared to the same period in 2007 was related to increased
revenues mostly attributable to industrial, power generation and healthcare
projects that resulted in higher gross margins. Included in the operating income
for the nine months ended September 30, 2007 was a $1.4 million gain on sale of
property.
Our United Kingdom construction and facilities services operating income for the
three months ended September 30, 2008 was $4.4 million compared to an operating
loss of $3.2 million for the three months ended September 30, 2007. This
segment's operating income was $10.5 million for the nine months ended September
30, 2008 compared to an operating loss of $5.0 million for the nine months ended
September 30, 2007. The improvement in operating income was primarily
attributable to the completion in 2007 of certain projects of the rail division
in connection with which we incurred losses during the three and nine months
ended September 30, 2007.
Other international construction and facilities services operating income was
breakeven for the three months ended September 30, 2008 compared to an operating
loss of $0.2 million for the three months ended September 30, 2007. This
segment's operating loss was $0.6 million for the nine months ended September
30, 2008 compared to an operating loss of $0.4 million for the nine months ended
September 30, 2007.
Corporate administration expense for the three months ended September 30, 2008
was $16.0 million compared to $14.6 million for the three months ended September
30, 2007. Corporate administrative expense for the nine months ended September
30, 2008 was $49.7 million compared to $44.7 million for the nine months ended
September 30, 2007. This increase in expenses was primarily due to increased
compensation and corporate initiatives supporting marketing and recruiting
programs.
Interest expense for the three months ended September 30, 2008 and 2007 was $2.5
million and $1.4 million, respectively. Interest expense for the nine months
ended September 30, 2008 and 2007 was $9.2 million and $2.5 million,
respectively. The increase in interest expense was primarily due to interest and
debt issuance cost amortization relating to our Term Loan incurred in September
2007 to finance the Ohmstede acquisition. On March 31, 2008, we made a
prepayment of indebtedness under the Term Loan of $24.25 million, which resulted
in our recording as interest expense accelerated amortization expense related to
capitalized debt issuance costs of $0.3 million for the nine months ended
September 30, 2008. Interest income for the three months ended September 30,
2008 was $2.4 million compared to $3.6 million for the three months ended
September 30, 2007. Interest income for the nine months ended September 30, 2008
was $7.6 million compared to $10.1 million for the nine months ended September
30, 2007. The decrease was primarily related to less cash available in 2008 to
invest.
For the three months ended September 30, 2008 and 2007, our income tax provision
was $28.9 million and $19.1 million, respectively. For the nine months ended
September 30, 2008 and 2007, our income tax provision was $76.9 million and
$45.4 million, respectively. The income tax provisions were recorded at
effective income tax rates of 38.7% and 38.0%, before certain adjustments, for
the nine months ended September 30, 2008 and 2007, respectively. Our income tax
rate was 37.3% for the three months ended September 30, 2008 and was lower than
the effective income tax rate of 38.7% for the nine months ended September 30,
2008, primarily due to a reduction in the valuation allowance for Canadian
deferred tax assets, partially offset by an increase in the liability for
unrecognized income tax benefits for fiscal 2008. Our income tax rate was 34.0%
for the three months ended September 30, 2007 and was lower than the effective
income tax rate of 38.0% for the nine months ended September 30, 2007, primarily
due to a reduction in the United Kingdom income before income taxes for fiscal
2007.
Liquidity and Capital Resources
The following table presents our net cash provided by (used in) operating
activities, investing activities and financing activities (in thousands):
For the nine months ended
September 30,
-----------------------------
2008 2007
---------- ----------
Net cash provided by operating activities $ 199,703 $ 132,740
Net cash used in investing activities $ (73,565) $(500,763)
Net cash (used in) provided by financing activities $ (24,865) $ 314,263
Effect of exchange rate changes on cash and cash equivalents $ (12,061) $ 3,102
Our consolidated cash balance increased by approximately $89.2 million from
$251.6 million at December 31, 2007 to $340.8 million at September 30, 2008. The
$199.7 million in net cash provided by operating activities for the nine months
ended September 30, 2008, which increased $67.0 million when compared to $132.7
million in net cash provided by operating activities for the nine months ended
September 30, 2007, was primarily due to an increase in net income. Net cash
used in investing activities of $73.6 million for the nine months ended
September 30, 2008 decreased $427.2 million compared to $500.8 million used in
the nine months ended September 30, 2007 and was primarily due to a $445.1
million decrease in payments for acquisitions of businesses, related
identifiable intangible assets and payments pursuant to related earn-out
agreements, partially offset by a $10.8 million increase in amounts paid for the
purchase of property, plant and equipment. Net cash used in financing activities
of $24.9 million for the nine months ended September 30, 2008 increased $339.1
million compared to net cash provided by financing activities of $314.3 million
for the nine months ended September 30, 2007 and was primarily attributable to
the $300.0 million of long-term debt incurred during 2007 to finance part of the
Ohmstede acquisition, a $6.4 million decrease in proceeds from exercise of stock
options and a $9.2 million decrease in excess tax benefits from share-based
compensation.
The following is a summary of material contractual obligations and other
commercial commitments (in millions):
Payments Due by Period
----------------------------------
Less
Contractual than 1-3 4-5 After
Obligations Total 1 year years years 5 years
- -------------------------------- -------- ------- ------ ----- -------
Term Loan $ 198.5 $ 3.0 $195.5 $ -- $ --
Other long-term debt 0.1 0.1 -- -- --
Capital lease obligations 2.0 0.8 1.0 0.2 --
Operating leases 226.4 55.8 83.0 43.1 44.5
Open purchase obligations (1) 914.7 675.7 230.6 8.3 0.1
Other long-term obligations (2) 249.0 29.1 198.5 21.4 --
Liabilities related to uncertain
income tax positions 13.3 2.7 10.6 -- --
-------- ------ ------ ----- ------
Total Contractual Obligations $1,604.0 $767.2 $719.2 $73.0 $ 44.6
======== ====== ====== ===== ======
Amount of
Commitment Expiration by Period
----------------------------------
Less
Other Commercial Total than 1-3 4-5 After
Commitments Committed 1 year years years 5 years
- -------------------------------- --------- ------- ------ ----- -------
Revolving Credit Facility (3) $ -- $ -- $ -- $ -- $ --
Letters of credit 47.9 -- 47.9 -- --
Guarantees 25.0 -- -- -- 25.0
-------- ------ ------ ----- ------
Total Commercial Obligations $ 72.9 $ -- $ 47.9 $ -- $ 25.0
======== ====== ====== ===== ======
(1) Represents open purchase orders for material and subcontracting costs
related to construction and service contracts. These purchase orders are
not reflected in EMCOR's condensed consolidated balance sheets and should
not impact future cash flows, as amounts will be recovered through customer
billings.
(2) Represents primarily insurance related liabilities, a pension plan
liability and liabilities for unrecognized income tax benefits, classified
as other long-term liabilities in the condensed consolidated balance
sheets. Cash payments for insurance related liabilities may be payable
beyond three years, but it is not practical to estimate these payments. We
provide funding to our pension plans based on at least the minimum funding
required by applicable regulations. In determining the minimum required
funding, we utilize current actuarial assumptions and exchange rates to
forecast estimates of amounts that may be payable for up to five years in
the future. In our judgment, minimum funding estimates beyond a five year
time horizon cannot be reliably estimated, and, therefore, have not been
included in the table.
(3) We classify these borrowings as short-term on our condensed consolidated
balance sheets because of our intent and ability to repay the amounts on a
short-term basis. As of September 30, 2008, there were no borrowings
outstanding under the Revolving Credit Facility.
Our revolving credit agreement (the "Revolving Credit Facility") provides for a
credit facility of $375.0 million. As of September 30, 2008 and December 31,
2007, we had approximately $47.9 million and $53.8 million of letters of credit
outstanding, respectively, under the Revolving Credit Facility. There were no
borrowings under the Revolving Credit Facility as of September 30, 2008 and
December 31, 2007.
On September 19, 2007, we entered into an agreement providing for a $300.0
million Term Loan. The proceeds were used to pay a portion of the consideration
for the acquisition of Ohmstede and costs and expenses incident thereto. The
Term Loan contains covenants, representations and warranties and events of
default. The Term Loan covenants require, among other things, maintenance of
certain financial ratios and contain certain restrictions with respect to
payment of dividends, common stock repurchases, investments, acquisitions,
indebtedness and capital expenditures. We are required to make principal
payments on the Term Loan in installments on the last day of March, June,
September and December of each year, commencing March 2008 in the amount of
$0.75 million, together with interest on the then outstanding principal amount.
A final payment comprised of all remaining principal and interest is due on
October 17, 2010. The Term Loan is secured by substantially all of our assets
and substantially all of the assets of substantially all of our U.S.
subsidiaries. The Term Loan bears interest at (1) the prime commercial lending
rate announced by Bank of Montreal from time to time (5.0% at September 30,
2008) plus 0.0% to 0.5% based on certain financial tests or (2) U.S. dollar
LIBOR (3.7% at September 30, 2008) plus 1.0% to 2.25% based on certain financial
tests. The interest rate in effect at September 30, 2008 was 4.7%. We have made
prepayments of $99.25 million, and mandatory payments of $2.25 million, to
reduce the balance of the Term Loan to $198.5 million at September 30, 2008.
One of our subsidiaries has guaranteed $25.0 million of borrowings by a joint
venture in which we have a 40% interest; the other venture partner, Baltimore
Gas and Electric, has a 60% interest. The venture designs, constructs, owns,
operates, leases and maintains facilities to produce chilled water for sale to
customers for use in air conditioning commercial properties. These guarantees
are not expected to have a material effect on our financial position or results
of operations. We and Baltimore Gas and Electric are jointly and severally
liable, in the event of default, for the venture's $25.0 million in borrowings.
The terms of our construction contracts frequently require that we obtain from
surety companies ("Surety Companies") and provide to our customers payment and
performance bonds ("Surety Bonds") as a condition to the award of such
contracts. The Surety Bonds secure our payment and performance obligations under
such contracts, and we have agreed to indemnify the Surety Companies for
amounts, if any, paid by them in respect of Surety Bonds issued on our behalf.
In addition, at the request of labor unions representing certain of our
employees, Surety Bonds are sometimes provided to secure obligations for wages
and benefits payable to or for such employees. Public sector contracts require
Surety Bonds more frequently than private sector contracts, and accordingly, our
bonding requirements typically increase as the amount of public sector work
increases. As of September 30, 2008, based on our percentage-of-completion of
our projects covered by Surety Bonds, our aggregate estimated exposure, had
there been defaults on all our existing contractual obligations, would have been
approximately $1.5 billion. The Surety Bonds are issued by Surety Companies in
return for premiums, which vary depending on the size and type of bond.
In recent years, there has been a reduction in the aggregate surety bond
issuance capacity of Surety Companies due to industry consolidations and
significant losses of Surety Companies as a result of providing Surety Bonds to
construction companies, as well as companies in other industries. Consequently,
the availability of Surety Bonds has become more limited and the terms upon
which Surety Bonds are available have become more restrictive. We continually
monitor our available limits of Surety Bonds and discuss with our current and
other Surety Bond providers the amount of Surety Bonds that may be available to
us based on our financial strength and the absence of any default by us on any
Surety Bond we have previously obtained. However, if we experience changes in
our bonding relationships or if there are further changes in the surety
industry, we may seek to satisfy certain customer requests for Surety Bonds by
posting other forms of collateral in lieu of Surety Bonds such as letters of
credit or guarantees by EMCOR Group, Inc., by seeking to convince customers to
forego the requirement for Surety Bonds, by increasing our activities in
business segments that rarely require Surety Bonds such as the facilities
services segment, and/or by refraining from bidding for certain projects that
require Surety Bonds. There can be no assurance that we will be able to
effectuate alternatives to providing Surety Bonds to our customers or to obtain,
on favorable terms, sufficient additional work that does not require Surety
Bonds to replace projects requiring Surety Bonds that we may decline to pursue.
Accordingly, if we were to experience a reduction in the availability of Surety
Bonds, we could experience a material adverse effect on our financial position,
results of operations and/or cash flow.
We do not have any other material financial guarantees or off-balance sheet
arrangements other than those disclosed above.
Our primary source of liquidity has been, and is expected to continue to be,
cash generated by operating activities. We also maintain our Revolving Credit
Facility that may be utilized, among other things, to meet short-term liquidity
needs in the event cash generated by operating activities is insufficient or to
enable us to seize opportunities to participate in joint ventures or to make
acquisitions that may require access to cash on short notice or for any other
reason. However, negative macroeconomic trends may have an adverse effect on
liquidity. In addition to managing borrowings, our focus on the facilities
services market is intended to provide an additional buffer against economic
downturns inasmuch as much of our facilities services business is characterized
by annual and multi-year contracts that provide a more predictable stream of
cash flow than the construction business. Short-term liquidity is also impacted
by the type and length of construction contracts in place. During past economic
downturns, there were typically fewer small discretionary projects from the
private sector, and companies like us aggressively bid more large long-term
infrastructure and public sector contracts. Performance of long duration
contracts typically requires working capital until initial billing milestones
are achieved. While we strive to maintain a net over-billed position with our
customers, there can be no assurance that a net over-billed position can be
maintained; however, we have been successful during the 2007 and 2008 periods of
strong demand for non-residential construction services in substantially
increasing our net over-billed position. Our net over-billings, defined as the
balance sheet accounts "billings in excess of costs and estimated earnings on
uncompleted contracts" less "cost and estimated earnings in excess of billings
on uncompleted contracts", were $553.8 million and $427.5 million as of
September 30, 2008 and December 31, 2007, respectively.
Long-term liquidity requirements can be expected to be met through cash
generated from operating activities and our Revolving Credit Facility. Based
upon our current credit ratings and financial position, we can reasonably expect
to be able to incur long-term debt to fund acquisitions. Over the long term, our
primary revenue risk factor continues to be the level of demand for
non-residential construction services, which is in turn influenced by
macroeconomic trends including interest rates and governmental economic policy.
In addition, our ability to perform profitable work is critical to meeting
long-term liquidity requirements.
We believe that current cash balances and borrowing capacity available under the
Revolving Credit Facility or other forms of financing available through
borrowings, combined with cash expected to be generated from operations, will be
sufficient to provide short-term and foreseeable long-term liquidity and meet
expected capital expenditure requirements. However, we are a party to lawsuits
and other proceedings in which other parties seek to recover from us amounts
ranging from a few thousand dollars to over $70.0 million. If we were required
to pay damages in one or more such proceedings, such payments could have a
material adverse effect on our financial position, results of operations and/or
cash flows.
Certain Insurance Matters
As of September 30, 2008 and December 31, 2007, we utilized approximately $46.3
million and $48.2 million, respectively, of letters of credit obtained under our
Revolving Credit Facility as collateral for our insurance obligations.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement No. 157, "Fair Value Measurements" ("Statement 157"). Statement 157
provides guidance for using fair value to measure assets and liabilities. The
statement applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value. The statement does not expand the use
of fair value in any new circumstances. Statement 157 was effective for our
financial statements beginning with the first quarter of 2008. The adoption of
Statement 157 did not affect our financial position or the results of
operations. However, on February 12, 2008, the FASB issued FASB Staff Position
No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP") that amends
Statement 157 to delay the effective date for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (that is, at least
annually). The FSP defers the effective date of Statement 157 to fiscal years
beginning after November 15, 2008. We have not determined the effect, if any,
the adoption of the FSP will have on our financial position and results of
operations. However, we believe we would likely be required to provide
additional disclosures in future financial statements beginning after the
effective date of the new standard.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("Statement 159"). Statement 159 permits entities to choose
to measure many financial instruments and certain other items at fair value.
Statement 159 was effective for our financial statements beginning with the
first quarter of 2008. We have elected not to account for any additional
financial instruments or other items at fair value pursuant to Statement 159.
In December 2007, the FASB issued Statement No. 141 (revised 2007), "Business
Combinations" ("Statement 141(R)"). Statement 141(R) changes the accounting for
acquisitions specifically eliminating the step acquisition model, changing the
recognition of contingent consideration from being recognized when it is
probable to being recognized at the time of acquisition, disallowing the
capitalization of transaction costs and changes when restructurings related to
acquisitions can be recognized. The standard is effective for fiscal years
beginning on or after December 15, 2008 and will only impact the accounting for
acquisitions that are made after adoption.
In December 2007, the FASB issued Statement No. 160, "Noncontrolling Interests
in Consolidated Financial Statements - an amendment of ARB No. 51" ("Statement
160"). This statement is effective for fiscal years beginning on or after
December 15, 2008, with earlier adoption prohibited. This statement requires the
recognition of a noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from our equity. The amount of
net income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. It also amends
certain of ARB No. 51's consolidation procedures for consistency with the
requirements of Statement 141(R). This statement also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. We have not determined the effect, if any, the adoption
of Statement 160 will have on our financial position and results of operations.
Application of Critical Accounting Policies
The condensed consolidated financial statements are based on the application of
significant accounting policies, which require management to make significant
estimates and assumptions. Our significant accounting policies are described in
Note B - Summary of Significant Accounting Policies of the notes to consolidated
financial statements included in Item 8 of the annual report on Form 10-K for
the year ended December 31, 2007. There was no initial adoption of any
accounting policies during the nine months ended September 30, 2008, except for
the adoption of Statement 157 and Statement 159. We believe that some of the
more critical judgment areas in the application of accounting policies that
affect our financial condition and results of operations are estimates and
judgments pertaining to: (a) revenue recognition from (i) long-term construction
contracts for which the percentage-of-completion method of accounting is used
and (ii) services contracts; (b) collectibility or valuation of accounts
receivable; (c) insurance liabilities; (d) income taxes; and (e) goodwill and
intangible assets.
Revenue Recognition for Long-term Construction Contracts and Services Contracts
We believe our most critical accounting policy is revenue recognition from
long-term construction contracts for which we use the percentage-of-completion
method of accounting. Percentage-of-completion accounting is the prescribed
method of accounting for long-term contracts in accordance with accounting
principles generally accepted in the United States, Statement of Position No.
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts", and, accordingly, the method used for revenue
recognition within our industry. Percentage-of-completion for each contract is
measured principally by the ratio of costs incurred to date to perform each
contract to the estimated total costs to perform such contract at completion.
Certain of our electrical contracting business units measure
percentage-of-completion by the percentage of labor costs incurred to date to
perform each contract to the estimated total labor costs to fully perform such
contract. Provisions for the entirety of estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
Application of percentage-of-completion accounting results in the recognition of
costs and estimated earnings in excess of billings on uncompleted contracts in
our condensed consolidated balance sheets. Costs and estimated earnings in
excess of billings on uncompleted contracts reflected in the condensed
consolidated balance sheets arise when revenues have been recognized but the
amounts cannot be billed under the terms of contracts. Such amounts are
recoverable from customers upon various measures of performance, including
achievement of certain milestones, completion of specified units or completion
of a contract. Costs and estimated earnings in excess of billings on uncompleted
contracts also include amounts we seek or will seek to collect from customers or
others for errors or changes in contract specifications or design, contract
change orders in dispute or unapproved as to both scope and price or other
customer-related causes of unanticipated additional contract costs. Such amounts
are recorded at estimated net realizable value and take into account factors
that may affect the ability to bill unbilled revenues and collect amounts after
billing. Due to uncertainties inherent in estimates employed in applying
percentage-of-completion accounting, estimates may be revised as project work
progresses. Application of percentage-of-completion accounting requires that the
impact of revised estimates be reported prospectively in the consolidated
financial statements. In addition to revenue recognition for long-term
construction contracts, we recognize revenues from service contracts as such
contracts are performed in accordance with Staff Accounting Bulletin No. 104,
"Revenue Recognition, revised and updated" ("SAB 104"). There are two basic
types of services contracts: (a) fixed price services contracts which are signed
in advance for maintenance, repair and retrofit work over periods typically
ranging from one to three years (pursuant to which our employees may be at a
customer's site full time) and (b) services contracts which may or may not be
signed in advance for similar maintenance, repair and retrofit work on an as
needed basis (frequently referred to as time and material work). Fixed price
facilities services contracts are generally performed over the contract period,
and, accordingly, revenue is recognized on a pro-rata basis over the life of the
contract. Revenues derived from other services contracts are recognized when the
services are performed in accordance with SAB 104. Expenses related to all
services contracts are recognized as incurred.
Accounts Receivable
We are required to estimate the collectibility of accounts receivable. A
considerable amount of judgment is required in assessing the likelihood of
realization of receivables. Relevant assessment factors include the
creditworthiness of the customer, our prior collection history with the customer
and related aging of the past due balances. The provision for bad debts during
the nine months ended September 30, 2008 increased $6.2 million compared to the
nine months ended September 30, 2007. At September 30, 2008 and December 31,
2007, accounts receivable of $1,489.5 million and $1,435.3 million,
respectively, included allowances of $28.4 million and $27.0 million,
respectively. Specific accounts receivable are evaluated when we believe a
customer may not be able to meet its financial obligations due to deterioration
of its financial condition or its credit ratings. The allowance requirements are
based on the best facts available and are re-evaluated and adjusted on a regular
basis and as additional information is received.
Insurance Liabilities
We have loss payment deductibles for certain workers' compensation, auto
liability, general liability and property claims, have self-insured retentions
for certain other casualty claims and are self-insured for employee-related
health care claims. Losses are recorded based upon estimates of our liability
for claims incurred and for claims incurred but not reported. The liabilities
are derived from known facts, historical trends and industry averages utilizing
the assistance of an actuary to determine the best estimate of these
obligations. We believe the liabilities recognized on our balance sheets for
these obligations are adequate. However, such obligations are difficult to
assess and estimate due to numerous factors, including severity of injury,
determination of liability in proportion to other parties, timely reporting of
occurrences and effectiveness of safety and risk management programs. Therefore,
if actual experience differs from the assumptions and estimates used for
recording the liabilities, adjustments may be required and will be recorded in
the period that the experience becomes known.
Income Taxes
We have net deferred tax liabilities primarily resulting from deductible
temporary differences of $11.0 million and $25.0 million at September 30, 2008
and December 31, 2007, respectively, which will increase our taxable income in
future periods. A valuation allowance is required when it is more likely than
not that all or a portion of a deferred tax asset will not be realized. As of
September 30, 2008 and December 31, 2007, the total valuation allowance was
approximately $5.3 million and $8.6 million, respectively. The reduction of the
valuation allowance is primarily related to the determination that certain
deferred tax assets in Canada are more likely than not to be realized based upon
cumulative earnings and forecasted future earnings.
Goodwill and Intangible Assets
As of September 30, 2008, we had $574.4 million and $270.8 million,
respectively, of goodwill and net identifiable intangible assets (primarily
based on the market values of our contract backlog, developed technology,
customer relationships, non-competition agreements and trade names), primarily
arising out of the acquisition of companies. As of December 31, 2007, goodwill
and net identifiable intangible assets were $563.9 million and $252.1 million,
respectively. The increases in the goodwill and net identifiable intangible
assets (net of accumulated amortization) since December 31, 2007 were related to
the acquisition of three companies during the first nine months of 2008, pending
completion of final valuation and purchase price adjustments. In addition,
goodwill increased due to an earn-out payment related to a prior year
acquisition. The determination of related estimated useful lives for
identifiable intangible assets and whether those assets are impaired involves
significant judgments based upon short and long-term projections of future
performance. These forecasts reflect assumptions regarding the ability to
successfully integrate acquired companies. FASB Statement No. 142, "Goodwill and
Other Intangible Assets" ("Statement 142") requires goodwill and other
intangible assets with indefinite useful lives not be amortized, but instead
must be tested at least annually for impairment (which we test each October 1),
and be written down if impaired, rather than amortized as previous standards
required. Furthermore, Statement 142 requires that identifiable intangible
assets with finite lives be amortized over their useful lives. Changes in
strategy and/or market conditions may result in adjustments to recorded
intangible asset balances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of September 30, 2008, we did not have any derivative instruments. We did not
use any material derivative financial instruments during the nine months ended
September 30, 2007, including trading or speculation on changes in interest
rates, or commodity prices of materials used in our business.
We are exposed to market risk for changes in interest rates for borrowings under
the Revolving Credit Facility and the Term Loan. Borrowings under the Revolving
Credit Facility and the Term Loan bear interest at variable rates, and the fair
value of borrowings are not affected by changes in market interest rates. As of
September 30, 2008, there were no borrowings outstanding under the Revolving
Credit Facility and the balance on the Term Loan was $198.5 million. Both
instruments bear interest at (1) a rate which is the prime commercial lending
rate announced by Bank of Montreal from time to time (5.0% at September 30,
2008) plus 0.0% to 0.5% based on certain financial tests or (2) United States
dollar LIBOR (3.7% at September 30, 2008) plus 1.0% to 2.25% based on certain
financial tests. The interest rates in effect at September 30, 2008 were 5.0%
and 4.7% for the prime commercial lending rate and the United States dollar
LIBOR, respectively. Letter of credit fees issued under the Revolving Credit
Facility range from 1.0% to 2.25% of the respective face amounts of the letters
of credit issued and are charged based on the type of letter of credit issued
and certain financial tests. The Revolving Credit Facility and the Term Loan
expire in October 2010. There is no guarantee that we will be able to renew the
Revolving Credit Facility at its expiration. Based on the $198.5 million
borrowings outstanding on the Term Loan, if the overall interest rates were to
increase by 1.0%, the net of tax interest expense would increase approximately
$1.2 million in the next twelve months. Conversely, if the overall interest
rates were to decrease by 1.0%, interest expense, net of income taxes, would
decrease by approximately $1.2 million in the next twelve months.
We are also exposed to construction market risk and its potential related impact
on accounts receivable or costs and estimated earnings in excess of billings on
uncompleted contracts. The amounts recorded may be at risk if our customers'
ability to pay these obligations is negatively impacted by economic conditions.
We continually monitor the creditworthiness of our customers and maintain
on-going discussions with customers regarding contract status with respect to
change orders and billing terms. Therefore, we believe we take appropriate
action to manage market and other risks, but there is no assurance that we will
be able to reasonably identify all risks with respect to collectibility of these
assets. See also the previous discussion of Accounts Receivable under the
heading, "Application of Critical Accounting Policies" in Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Amounts invested in our foreign operations are translated into U.S. dollars at
the exchange rates in effect at the end of the period. The resulting translation
adjustments are recorded as accumulated other comprehensive income (loss), a
component of stockholders' equity, in our condensed consolidated balance sheets.
We believe the exposure to the effects that fluctuating foreign currencies may
have on the consolidated results of operations is limited because the foreign
operations primarily invoice customers and collect obligations in their
respective local currencies. Additionally, expenses associated with these
transactions are generally contracted and paid for in their same local
currencies.
In addition, we are exposed to market risk of fluctuations in certain commodity
prices of materials such as copper and steel, which are used as components of
supplies or materials utilized in both our construction and facilities services
operations. We are also exposed to increases in energy prices, particularly as
they relate to gasoline prices for our fleet of over 7,500 vehicles. While we
believe we can increase our prices to adjust for some price increases in
commodities, there can be no assurance that continued price increases of
commodities, if they were to occur, would be recoverable.
ITEM 4. CONTROLS AND PROCEDURES.
Based on an evaluation of our disclosure controls and procedures (as required by
Rule 13a-15(b) of the Securities Exchange Act of 1934), our Chairman of the
Board of Directors and Chief Executive Officer, Frank T. MacInnis, and our
Executive Vice President and Chief Financial Officer, Mark A. Pompa, have
concluded that our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchanges Act of 1934) are effective as of the end
of the period covered by this report.
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the
Securities Exchange Act of 1934) during the fiscal quarter ended September 30,
2008 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. - OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
Except as indicated below, there have been no material developments during the
quarter ended September 30, 2008 regarding legal proceedings reported in our
Annual Report on Form 10-K for the year ended December 31, 2007 or in our Form
10-Q for the quarter ended June 30, 2008.
In connection with a project (the "Project") for the construction in Virginia of
a wastewater treatment facility for the Upper Occoquan Sewage Authority
("UOSA"), in which our subsidiary Poole & Kent Corporation participated as a
co-venturer with an unrelated party (the "Joint Venture"), the Joint Venture in
2000 commenced a civil action in the Fairfax, Virginia Circuit Court (the
"Court") against UOSA alleging material breaches of the construction contract
(the "Contract") for the Project. As a result of a jury verdict in March 2005 in
that action and a subsequent ruling in June 2005 of the trial judge in the
action, it was determined that the Joint Venture was entitled to be paid
approximately $17.0 million by UOSA, which amount was in addition to that which
the Joint Venture had already received from UOSA.
In June 2005, the trial judge ordered that related claims asserted by the Joint
Venture against UOSA for breach of the Contract and for recovery of amounts
withheld by UOSA in respect to payments owing to the Joint Venture under the
Contract should be pursued in a separate trial. UOSA subsequently filed a claim
pursuant to a Virginia statute for recovery of most of its attorneys' fees
associated with that pending trial. All of these claims have been tried before a
jury, which in May 2008, rendered a verdict resulting in a net award to UOSA of
approximately $1.3 million, of which approximately one-half is payable by the
Company. On July 14, 2008, the Joint Venture filed a motion requesting (a) that,
notwithstanding the verdict, the trial judge award it amounts relating to
certain of the Joint Venture's claims and vacate the award to UOSA of its claim
for attorney's fees, or, in the alternative, set aside the verdict with respect
to those claims and the award to UOSA and order a new trial with respect to such
matters and (b) that the rest of the verdict be set aside and a new trial be
held with respect to the claims as to which such portion of the verdict related.
On September 25, 2008, the trial judge denied the Joint Venture's motions and
entered a final order in the litigation. The Joint Venture is now seeking to
have the decisions of the trial judge resulting in the September 25, 2008 final
order reversed on appeal to the Virginia Supreme Court, with a view towards
granting a new trial or, alternatively, granting certain specific relief to the
Joint Venture without the need for a new trial. However, there is no assurance
that the Virginia Supreme Court will hear the appeal or, if the appeal is heard,
it will be resolved in favor of the Joint Venture.
ITEM 6. EXHIBITS.
Exhibit Incorporated By Reference to or
No. Description Page Number
- ----------- -------------------------------------------------------- -------------------------------------------
2(a-1) Purchase Agreement dated as of February 11, 2002 by Exhibit 2.1 to EMCOR Group, Inc.'s ("EMCOR")
and among Comfort Systems USA, Inc. and EMCOR-CSI Report on Form 8-K dated February 14, 2002
Holding Co.
2(a-2) Purchase and Sale Agreement dated as of August 20, Exhibit 2.1 to EMCOR's Report on Form 8-K
2007 between FR X Ohmstede Holdings LLC and EMCOR (Date of Report August 20, 2007)
Group, Inc.
3(a-1) Restated Certificate of Incorporation of EMCOR filed Exhibit 3(a-5) to EMCOR's Registration
December 15, 1994 Statement on Form 10 as originally filed
March 17, 1995 ("Form 10")
3(a-2) Amendment dated November 28, 1995 to the Restated Exhibit 3(a-2) to EMCOR's Annual Report on
Certificate of Incorporation of EMCOR Form 10-K for the year ended December 31,
1995 ("1995 Form 10-K")
3(a-3) Amendment dated February 12, 1998 to the Restated Exhibit 3(a-3) to EMCOR's Annual Report on
Certificate of Incorporation Form 10-K for the year ended December 31,
1997 ("1997 Form 10-K")
3(a-4) Amendment dated January 27, 2006 to the Restated Exhibit 3(a-4) to EMCOR's Annual Report on
Certificate of Incorporation Form 10-K for the year ended December 31,
2005 ("2005 Form 10-K")
3(a-5) Amendment dated September 18, 2007 to the Restated Exhibit A to EMCOR's Proxy Statement dated
Certificate of Incorporation August 17, 2007 for Special Meeting of
Stockholders held September 18, 2007
3(b) Amended and Restated By-Laws Exhibit 3(b) to EMCOR's Annual Report on
Form 10-K for the year ended December 31,
1998 ("1998 Form 10-K")
4(a) U.S. $375,000,000 (originally U.S. $350,000,000) Credit Exhibit 4 to EMCOR's Report on Form 8-K
Agreement dated October 14, 2005 by and among EMCOR (Date of Report October 17, 2005)
Group, Inc. and certain of its subsidiaries and Harris
N.A. individually and as Agent for the Lenders which are
or became parties thereto (the "Credit Agreement")
4(b) Assignment and Acceptance dated October 14, 2005 Exhibit 4(b) to 2005 Form 10-K
between Harris Nesbitt Financing, Inc. ("HNF") as
assignor, and Bank of Montreal, as assignee of 100%
interest of HNF in the Credit Agreement to Bank of
Montreal
4(c) Commitment Amount Increase Request dated November Exhibit 4(c) to 2005 Form 10-K
21, 2005 between EMCOR and the Northern Trust
Company effective November 29, 2005 pursuant to
Section 1.10 of the Credit Agreement
4(d) Commitment Amount Increase Request dated November Exhibit 4(d) to 2005 Form 10-K
21, 2005 between EMCOR and Bank of Montreal
effective November 29, 2005 pursuant to Section 1.10
of the Credit Agreement
4(e) Commitment Amount Increase Request dated November Exhibit 4(e) to 2005 Form 10-K
21, 2005 between EMCOR and National City Bank of
Indiana effective November 29, 2005 pursuant to
Section 1.10 of the Credit Agreement
ITEM 6. EXHIBITS. - (continued)
Exhibit Incorporated By Reference to or
No. Description Page Number
- ----------- -------------------------------------------------------- -------------------------------------------
4(f) Assignment and Acceptance dated November 29, 2005 Exhibit 4(f) to 2005 Form 10-K
between Bank of Montreal, as assignor, and Fifth
Third Bank, as assignee, of 30% interest of Bank of
Montreal in the Credit Agreement to Fifth Third Bank
4(g) Assignment and Acceptance dated November 29, 2005 Exhibit 4(g) to 2005 Form 10-K
between Bank of Montreal, as assignor, and Northern
Trust Company, as assignee, of 20% interest of Bank
of Montreal in the Credit Agreement to Northern
Trust Company
4(h) Term Loan Agreement dated as of September 19, 2007 Exhibit 4.1(a) to EMCOR's Form 8-K (Date of
among EMCOR, Bank of Montreal, as Administrative Report September 19, 2007)
Agent, and the several financial institutions listed on
the signature pages thereof
4(i) Second Amended and Restated Security Agreement dated as Exhibit 4.1(b) to EMCOR's Form 8-K (Date of
of September 19, 2007 among EMCOR, certain of its U.S. Report September 19, 2007)
subsidiaries, and Harris N.A., as Agent
4(j) Second Amended and Restated Pledge Agreement dated as of Exhibit 4.1(c) to EMCOR's Form 8-K (Date of
September 19, 2007 among EMCOR, certain of its U.S. Report September 19, 2007)
subsidiaries, and Harris N.A., as Agent
4(k) Guaranty Agreement by certain of EMCOR's U.S. Exhibit 4.1(d) to EMCOR's Form 8-K (Date of
subsidiaries in favor of Harris N.A., as Agent Report September 19, 2007)
4(l) First Amendment dated as of September 19, 2007 to Exhibit 4.1(e) to EMCOR's Form 8-K (Date of
Amended and Restated Credit Agreement effective Report September 19, 2007)
October 14, 2005 among EMCOR, Harris N.A., as Agent,
and certain other lenders party thereto
10(a) Severance Agreement between EMCOR and Frank T. Exhibit 10.2 to EMCOR's Report on Form 8-K
MacInnis (Date of Report April 25, 2005) ("April
2005 Form 8-K")
10(b) Form of Severance Agreement ("Severance Agreement") Exhibit 10.1 to the April 2005 Form 8-K
between EMCOR and each of Sheldon I. Cammaker, R.
Kevin Matz and Mark A. Pompa
10(c) Form of Amendment to Severance Agreement between Exhibit 10(c) to EMCOR's Quarterly Report
EMCOR and each of Frank T. MacInnis, Sheldon I. on Form 10-Q for the quarter ended March
Cammaker, R. Kevin Matz and Mark A. Pompa 31, 2007 ("March 2007 Form 10-Q")
10(d) Letter Agreement dated October 12, 2004 between Exhibit 10.1 to EMCOR's Report on Form 8-K
Anthony Guzzi and EMCOR (the "Guzzi Letter (Date of Report October 12, 2004)
Agreement")
10(e) Form of Confidentiality Agreement between Anthony Exhibit C to the Guzzi Letter Agreement
Guzzi and EMCOR
10(f) Form of Indemnification Agreement between EMCOR and Exhibit F to the Guzzi Letter Agreement
each of its officers and directors
10(g-1) Severance Agreement ("Guzzi Severance Agreement") Exhibit D to the Guzzi Letter Agreement
dated October 25, 2004 between Anthony Guzzi and
EMCOR
10(g-2) Amendment to Guzzi Severance Agreement Exhibit 10(g-2) to the March 2007 Form 10-Q
10(h-1) 1994 Management Stock Option Plan ("1994 Option Plan") Exhibit 10(o) to Form 10
ITEM 6. EXHIBITS. - (continued)
Exhibit Incorporated By Reference to or
No. Description Page Number
- ----------- -------------------------------------------------------- -------------------------------------------
10(h-2) Amendment to Section 12 of the 1994 Option Plan Exhibit (g-2) to EMCOR's Annual Report on
Form 10-K for the year ended December 31,
2000 ("2000 Form 10-K")
10(h-3) Amendment to Section 13 of the 1994 Option Plan Exhibit (g-3) to 2000 Form 10-K
10(i-1) 1995 Non-Employee Directors' Non-Qualified Stock Exhibit 10(p) to Form 10
Option Plan ("1995 Option Plan")
10(i-2) Amendment to Section 10 of the 1995 Option Plan Exhibit (h-2) to 2000 Form 10-K
10(j-1) 1997 Non-Employee Directors' Non-Qualified Stock Exhibit 10(k) to EMCOR's Annual Report on
Option Plan ("1997 Option Plan") Form 10-K for the year ended December 31,
1999 ("1999 Form 10-K")
10(j-2) Amendment to Section 9 of the 1997 Option Plan Exhibit 10(i-2) to 2000 Form 10-K
10(k) 1997 Stock Plan for Directors Exhibit 10(1) to 1999 Form 10-K
10(l-1) Continuity Agreement dated as of June 22, 1998 Exhibit 10(a) to EMCOR's Quarterly Report
between Frank T. MacInnis and EMCOR ("MacInnis on Form 10-Q for the quarter ended June 30,
Continuity Agreement") 1998 ("June 1998 Form 10-Q")
10(l-2) Amendment dated as of May 4, 1999 to MacInnis Exhibit 10(h) to EMCOR's Quarterly Report
Continuity Agreement on Form 10-Q for the quarter ended June 30,
1999 ("June 1999 Form 10-Q")
10(l-3) Amendment dated as of March 1, 2007 to MacInnis Exhibit 10(l-3) to the March 2007 Form 10-Q
Continuity Agreement
10(m-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(c) to the June 1998 Form 10-Q
Sheldon I. Cammaker and EMCOR ("Cammaker Continuity
Agreement")
10(m-2) Amendment dated as of May 4, 1999 to Cammaker Exhibit 10(i) to the June 1999 Form 10-Q
Continuity Agreement
10(m-3) Amendment dated as of March 1, 2007 to Cammaker Exhibit 10(m-3) to the March 2007 Form 10-Q
Continuity Agreement
10(n-1) Continuity Agreement dated as of June 22, 1998 Exhibit 10(f) to the June 1998 Form 10-Q
between R. Kevin Matz and EMCOR ("Matz Continuity
Agreement")
10(n-2) Amendment dated as of May 4, 1999 to Matz Continuity Exhibit 10(m) to the June 1999 Form 10-Q
Agreement
10(n-3) Amendment dated as of January 1, 2002 to Matz Exhibit 10(o-3) to EMCOR's Quarterly
Continuity Agreement Report on Form 10-Q for the quarter ended
March 31, 2002 ("March 2002 Form 10-Q")
10(n-4) Amendment dated as of March 1, 2007 to Matz Exhibit 10(n-4) to the March 2007 Form 10-Q
Continuity Agreement
10(o-1) Continuity Agreement dated as of June 22, 1998 Exhibit 10(g) to the June 1998 Form 10-Q
between Mark A. Pompa and EMCOR ("Pompa Continuity
Agreement")
10(o-2) Amendment dated as of May 4, 1999 to Pompa Exhibit 10(n) to the June 1999 Form 10-Q
Continuity Agreement
10(o-3) Amendment dated as of January 1, 2002 to Pompa Exhibit 10(p-3) to the March 2002 Form 10-Q
Continuity Agreement
ITEM 6. EXHIBITS. - (continued)
Exhibit Incorporated By Reference to or
No. Description Page Number
- ----------- -------------------------------------------------------- -------------------------------------------
10(o-4) Amendment dated as of March 1, 2007 to Pompa Exhibit 10(o-4) to the March 2007 Form 10-Q
Continuity Agreement
10(p-1) Change of Control Agreement dated as of October 25, Exhibit E to the Guzzi Letter Agreement
2004 between Anthony Guzzi ("Guzzi") and EMCOR
("Guzzi Continuity Agreement")
10(p-2) Amendment dated as of March 1, 2007 to Guzzi Exhibit 10(p-2) to the March 2007 Form 10-Q
Continuity Agreement
10(q-1) Executive Stock Bonus Plan, as amended (the "Stock Exhibit 4.1 to EMCOR's Registration
Bonus Plan") Statement on Form S-8 (No. 333-112940)
filed with the Securities and Exchange
Commission of February 18, 2004 ("2004
Form S-8")
10(q-2) Amendment to Executive Stock Bonus Plan Exhibit 10(s-2) to the March 2007 Form 10-Q
10(q-3) Form of Certificate Representing Restrictive Stock Exhibit 10.1 to EMCOR's Report on Form 8-K
Units ("RSU's") issued under the Stock Bonus Plan (Date of Report March 4, 2005) ("March 4,
Manditorily Awarded 2005 Form 8-K")
10(q-4) Form of Certificate Representing RSU's issued under Exhibit 10.2 to March 4, 2005 Form 8-K
the Stock Bonus Plan Voluntarily Awarded
10(r) Incentive Plan for Senior Executive Officers of Exhibit 10.3 to March 4, 2005 Form 8-K
EMCOR Group, Inc. ("Incentive Plan for Senior
Executives")
10(s-1) First Amendment to Incentive Plan for Senior Exhibit 10(t) to 2005 Form 10-K
Executives
10(s-2) Second Amendment to Incentive Plan for Senior Exhibit 10.1 to EMCOR's Report on Form 8-K
Executives (Date of Report March 26, 2008)
10(t-1) EMCOR Group, Inc. Long-Term Incentive Plan ("LTIP") Exhibit 10 to Form 8-K (Date of Report
December 15, 2005)
10(t-2) Form of Certificate Representing Stock Units issued Exhibit 10(t-2) to EMCOR's Annual Report
under LTIP on Form 10-K for the year ended December
31, 2007 ("2007 Form 10-K")
10(u-1) 2003 Non-Employee Directors' Stock Option Plan Exhibit A to EMCOR's Proxy Statement for
its Annual Meeting held on June 12, 2003
("2003 Proxy Statement")
10(u-2) First Amendment to 2003 Non-Employee Director Plan Exhibit 10(u-2) to EMCOR's Annual Report
on Form 10-K for the year ended December
31, 2006 ("2006 Form 10-K")
10(v-1) 2003 Management Stock Incentive Plan Exhibit B to EMCOR's 2003 Proxy Statement
10(v-2) Amendments to 2003 Management Stock Incentive Plan Exhibit 10(t-2) to EMCOR's Annual Report
on Form 10-K for the year ended December
31, 2003 ("2003 Form 10-K")
10(v-3) Second Amendment to 2003 Management Stock Incentive Exhibit 10(v-3) to 2006 Form 10-K
Plan
10(w) Form of Stock Option Agreement evidencing grant of Exhibit 10.1 to Form 8-K (Date of Report
stock options under the 2003 Management Stock January 5, 2005)
Incentive Plan
10(x) Key Executive Incentive Bonus Plan Exhibit B to EMCOR's Proxy Statement for
its Annual Meeting held June 16, 2005
("2005 Proxy Statement")
ITEM 6. EXHIBITS. - (continued)
Exhibit Incorporated By Reference to or
No. Description Page Number
- ----------- -------------------------------------------------------- -------------------------------------------
10(y) 2005 Management Stock Incentive Plan Exhibit B to EMCOR's 2005 Proxy Statement
10(z) First Amendment to 2005 Management Stock Incentive Exhibit 10(z) to 2006 Form 10-K
Plan
10(a)(a-1) 2005 Stock Plan for Directors Exhibit C to 2005 Proxy Statement
10(a)(a-2) First Amendment to 2005 Stock Plan for Directors Exhibit 10(a)(a-2) to 2006 Form 10-K
10(b)(b) Option Agreement between EMCOR and Frank T. MacInnis Exhibit 4.4 to 2004 Form S-8
dated May 5, 1999
10(c)(c) Form of EMCOR Option Agreement for Messrs. Frank T. Exhibit 4.5 to 2004 Form S-8
MacInnis, Jeffrey M. Levy, Sheldon I. Cammaker,
Leicle E. Chesser, R. Kevin Matz and Mark A. Pompa
(collectively the "Executive Officers") for options
granted January 4, 1999, January 3, 2000 and January
2, 2001
10(d)(d) Form of EMCOR Option Agreement for Executive Exhibit 4.6 to 2004 Form S-8
Officers granted December 1, 2001
10(e)(e) Form of EMCOR Option Agreement for Executive Exhibit 4.7 to 2004 Form S-8
Officers granted January 2, 2002, January 2, 2003
and January 2, 2004
10(f)(f) Form of EMCOR Option Agreement for Directors granted Exhibit 4.8 to 2004 Form S-8
June 19, 2002, October 25, 2002 and February 27, 2003
10(g)(g) Form of EMCOR Option Agreement for Executive Exhibit 10(g)(g) to 2005 Form 10-K
Officers and Guzzi dated January 3, 2005
10(h)(h-1) 2007 Incentive Plan Exhibit B to EMCOR's Proxy Statement for
its Annual Meeting held June 20, 2007
10(h)(h-2) Option agreement dated December 13, 2007 under 2007 Exhibit 10(h)(h-2) to 2007 Form 10-K
Incentive Plan between Jerry E. Ryan and EMCOR
10(h)(h-3) Form of Option Agreement under 2007 Incentive Plan Exhibit 10(h)(h-3) to 2007 Form 10-K
between EMCOR and each non-employee director
electing to receive options as part of annual
retainer
10(i)(i) Form of letter agreement between EMCOR and each Exhibit 10(b)(b) to 2004 Form 10-K
Executive Officer with respect to acceleration of
options granted January 2, 2003 and January 2, 2004
10(j)(j-1) Certificate dated March 24, 2008 evidencing Phantom Exhibit 10(j)(j-1) to EMCOR's Quarterly
Stock Unit Award to Frank T. MacInnis Report on Form 10-Q for the quarter ended
March 31, 2008 ("March 2008 Form 10-Q")
10(j)(j-2) Certificate dated March 24, 2008 evidencing Phantom Exhibit 10(j)(j-2) to the March 2008 Form
Stock Unit Award to Anthony J. Guzzi 10-Q
10(k)(k) Certificate dated March 24, 2008 evidencing Stock Exhibit 10(k)(k) to the March 2008 Form
Unit Award to Frank T. MacInnis 10-Q
10(l)(l) EMCOR Group, Inc. Employee Stock Purchase Plan Exhibit C to EMCOR's Proxy Statement for
its Annual Meeting held June 18, 2008
ITEM 6. EXHIBITS. - (continued)
Exhibit Incorporated By Reference to or
No. Description Page Number
- ----------- -------------------------------------------------------- -------------------------------------------
11 Computation of Basic EPS and Diluted EPS for the Note E of the Notes to the Condensed
three and nine months ended September 30, 2008 and Consolidated Financial Statements
2007
31.1 Certification Pursuant to Section 302 of the Page _____
Sarbanes-Oxley Act of 2002 by the Chairman of the
Board of Directors and Chief Executive Officer *
31.2 Certification Pursuant to Section 302 of the Page _____
Sarbanes-Oxley Act of 2002 by the Executive Vice
President and Chief Financial Officer *
32.1 Certification Pursuant to Section 906 of the Page _____
Sarbanes-Oxley Act of 2002 by the Chairman of the
Board of Directors and Chief Executive Officer **
32.2 Certification Pursuant to Section 906 of the Page _____
Sarbanes-Oxley Act of 2002 by the Executive Vice
President and Chief Financial Officer **
- ------------
* Filed Herewith
** Furnished Herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 23, 2008
EMCOR GROUP, INC.
-------------------------------------------------
(Registrant)
By: /s/FRANK T. MACINNIS
-------------------------------------------------
Frank T. MacInnis
Chairman of the Board of
Directors and
Chief Executive Officer
(Principal Executive Officer)
/s/MARK A. POMPA
-------------------------------------------------
Mark A. Pompa
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 31.1
CERTIFICATION
I, Frank T. MacInnis, Chairman of the Board of Directors and Chief Executive
Officer of EMCOR Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of EMCOR Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15(d)-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 23, 2008
/s/FRANK T. MACINNIS
-------------------------------------
Frank T. MacInnis
Chairman of the Board of
Directors and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Mark A. Pompa, Executive Vice President and Chief Financial Officer of EMCOR
Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of EMCOR Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15(d)-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 23, 2008
/s/MARK A. POMPA
-------------------------------------
Mark A. Pompa
Executive Vice President and
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of EMCOR Group, Inc. (the "Company") on
Form 10-Q for the period ended September 30, 2008 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Frank T. MacInnis,
Chairman of the Board of Directors and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: October 23, 2008 /s/FRANK T. MACINNIS
-----------------------------------
Frank T. MacInnis
Chairman of the Board of
Directors and
Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of EMCOR Group, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2008 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Mark A. Pompa, Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: October 23, 2008 /s/MARK A. POMPA
-----------------------------------
Mark A. Pompa
Executive Vice President and
Chief Financial Officer